Is Appian (NASDAQ:APPN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Appian Corporation (NASDAQ:APPN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Appian

How Much Debt Does Appian Carry?

As you can see below, at the end of June 2023, Appian had US$208.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$237.0m in cash, so it actually has US$28.7m net cash.

How Healthy Is Appian's Balance Sheet?

According to the last reported balance sheet, Appian had liabilities of US$325.0m due within 12 months, and liabilities of US$206.8m due beyond 12 months. Offsetting this, it had US$237.0m in cash and US$134.0m in receivables that were due within 12 months. So it has liabilities totalling US$160.7m more than its cash and near-term receivables, combined.

Of course, Appian has a market capitalization of US$3.00b, 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. Despite its noteworthy liabilities, Appian boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Appian can strengthen its balance sheet over time. 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 Appian wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$507m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Appian?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Appian had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$106m of cash and made a loss of US$158m. While this does make the company a bit risky, it's important to remember it has net cash of US$28.7m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Appian may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Appian you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.