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Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Altair Engineering Inc. (NASDAQ: ALTR) carries debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Altair Engineering’s net debt?
You can click on the graph below for the historical figures, but it shows that Altair Engineering had a debt of US $ 196.8 million in September 2021, up from US $ 215.5 million a year earlier. However, his balance sheet shows that he has $ 455.9 million in cash, so he actually has $ 259.1 million in net cash.
NasdaqGS: ALTR History of debt to equity November 6, 2021
How strong is Altair Engineering’s balance sheet?
According to the latest published balance sheet, Altair Engineering had liabilities of US $ 347.9 million due within 12 months and liabilities of US $ 64.3 million due beyond 12 months. On the other hand, it had US $ 455.9 million in cash and US $ 97.6 million in receivables due within a year. He can therefore claim $ 141.3 million more in liquid assets than total Liabilities.
This surplus suggests that Altair Engineering has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Put simply, the fact that Altair Engineering has more cash than debt is arguably a good indication that it can safely manage its debt.
Notably, Altair Engineering’s EBIT was higher than Elon Musk’s, gaining a whopping 114% from last year. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Altair Engineering’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Altair Engineering may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Fortunately for all shareholders, Altair Engineering has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
In summary
While we agree with those investors who find the debt of concern, you should keep in mind that Altair Engineering has net cash of US $ 259.1 million, as well as more than $ 259.1 million in liquid assets. passive. And he impressed us with free cash flow of US $ 50 million, or 402% of his EBIT. So is Altair Engineering’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 1 warning sign we spotted with Altair Engineering .
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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