Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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, Alteryx, Inc. (NYSE:AYX) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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.
View our latest analysis for Alteryx
How Much Debt Does Alteryx Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Alteryx had US$686.0m of debt, an increase on US$170.9m, over one year. But it also has US$874.4m in cash to offset that, meaning it has US$188.4m net cash.
How Strong Is Alteryx's Balance Sheet?
We can see from the most recent balance sheet that Alteryx had liabilities of US$190.8m falling due within a year, and liabilities of US$661.8m due beyond that. On the other hand, it had cash of US$874.4m and US$67.7m worth of receivables due within a year. So it actually has US$89.6m more liquid assets than total liabilities.
Having regard to Alteryx's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$6.23b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Alteryx has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Alteryx made a loss at the EBIT level, last year, but improved that to positive EBIT of US$21m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alteryx can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Alteryx has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Alteryx generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Alteryx has US$188.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$21m, being 100% of its EBIT. So we don't have any problem with Alteryx's use of debt. We'd be motivated to research the stock further if we found out that Alteryx insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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