Allot (NASDAQ:ALLT) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Allot Ltd. (NASDAQ:ALLT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Allot

What Is Allot's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Allot had debt of US$39.4m, up from none in one year. But it also has US$115.5m in cash to offset that, meaning it has US$76.1m net cash.

How Healthy Is Allot's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Allot had liabilities of US$55.7m due within 12 months and liabilities of US$59.3m due beyond that. Offsetting this, it had US$115.5m in cash and US$40.8m in receivables that were due within 12 months. So it actually has US$41.4m more liquid assets than total liabilities.

It's good to see that Allot has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Allot has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Allot can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Allot wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to US$146m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Allot?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Allot had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$26m of cash and made a loss of US$17m. With only US$76.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Allot .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.