Is Allot (NASDAQ:ALLT) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Allot Ltd. (NASDAQ:ALLT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Allot

How Much Debt Does Allot Carry?

As you can see below, at the end of December 2022, Allot had US$39.6m of debt, up from none a year ago. Click the image for more detail. But it also has US$85.4m in cash to offset that, meaning it has US$45.8m net cash.

How Strong Is Allot's Balance Sheet?

The latest balance sheet data shows that Allot had liabilities of US$60.6m due within a year, and liabilities of US$50.4m falling due after that. On the other hand, it had cash of US$85.4m and US$52.2m worth of receivables due within a year. So it actually has US$26.5m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allot's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Allot had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$123m. That's not what we would hope to see.

So How Risky Is Allot?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$38m of cash and made a loss of US$32m. Given it only has net cash of US$45.8m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Allot you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.