Is Appian (NASDAQ:APPN) Using Debt In A Risky Way?

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. Importantly, Appian Corporation (NASDAQ:APPN) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Appian

What Is Appian's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Appian had debt of US$118.1m, up from none in one year. However, its balance sheet shows it holds US$196.0m in cash, so it actually has US$77.9m net cash.

A Look At Appian's Liabilities

Zooming in on the latest balance sheet data, we can see that Appian had liabilities of US$270.3m due within 12 months and liabilities of US$178.3m due beyond that. Offsetting these obligations, it had cash of US$196.0m as well as receivables valued at US$166.0m due within 12 months. So it has liabilities totalling US$86.6m more than its cash and near-term receivables, combined.

Of course, Appian has a market capitalization of US$3.35b, 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, Appian 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 Appian'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 Appian wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$468m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Appian?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Appian lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$116m of cash and made a loss of US$151m. But the saving grace is the US$77.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Appian's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 1 warning sign with Appian , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.