Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Altair Engineering Inc. (NASDAQ:ALTR) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Altair Engineering
What Is Altair Engineering's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2022 Altair Engineering had debt of US$305.6m, up from US$199.7m in one year. However, it does have US$316.1m in cash offsetting this, leading to net cash of US$10.5m.
How Strong Is Altair Engineering's Balance Sheet?
The latest balance sheet data shows that Altair Engineering had liabilities of US$232.7m due within a year, and liabilities of US$402.3m falling due after that. Offsetting these obligations, it had cash of US$316.1m as well as receivables valued at US$183.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$135.0m.
Of course, Altair Engineering has a market capitalization of US$5.63b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Altair Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 7.5%, to US$572m. 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$30m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 1 warning sign with Altair Engineering , and understanding them should be part of your investment process.
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.
About NasdaqGS:ALTR
Altair Engineering
Provides software and cloud solutions in the areas of simulation and design, high-performance computing, data analytics, and artificial intelligence in the United States and internationally.
Flawless balance sheet with moderate growth potential.