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, Altair Engineering Inc. (NASDAQ:ALTR) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Altair Engineering Carry?
As you can see below, Altair Engineering had US$307.4m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$467.5m in cash to offset that, meaning it has US$160.1m net cash.
How Strong Is Altair Engineering's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Altair Engineering had liabilities of US$324.1m due within 12 months and liabilities of US$328.1m due beyond that. On the other hand, it had cash of US$467.5m and US$209.8m worth of receivables due within a year. So it actually has US$25.1m more liquid assets than total liabilities.
Having regard to Altair Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$6.82b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Altair Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Altair Engineering turned things around in the last 12 months, delivering and EBIT of US$5.9m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Altair Engineering 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Altair Engineering may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Altair Engineering actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case Altair Engineering has US$160.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,969% of that EBIT to free cash flow, bringing in US$117m. So we don't think Altair Engineering's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Altair Engineering you should know about.
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.