Health Check: How Prudently Does Altair Engineering (NASDAQ:ALTR) Use Debt?

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. Importantly, Altair Engineering Inc. (NASDAQ:ALTR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 Altair Engineering

What Is Altair Engineering's Debt?

The chart below, which you can click on for greater detail, shows that Altair Engineering had US$307.0m in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds US$431.2m in cash, so it actually has US$124.2m net cash.

How Healthy Is Altair Engineering's Balance Sheet?

The latest balance sheet data shows that Altair Engineering had liabilities of US$296.9m due within a year, and liabilities of US$321.0m falling due after that. Offsetting these obligations, it had cash of US$431.2m as well as receivables valued at US$137.4m due within 12 months. So its liabilities total US$49.3m more than the combination of its cash and short-term receivables.

Having regard to Altair Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$7.39b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Altair Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Altair Engineering's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Altair Engineering wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to US$602m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Altair Engineering?

While Altair Engineering lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$108m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Altair Engineering insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.