- Oops!Something went wrong.Please try again later.
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Altair Engineering Inc. (NASDAQ:ALTR) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Altair Engineering's Debt?
As you can see below, at the end of September 2020, Altair Engineering had US$215.5m of debt, up from US$174.9m a year ago. Click the image for more detail. However, it does have US$245.4m in cash offsetting this, leading to net cash of US$29.9m.
How Healthy Is Altair Engineering's Balance Sheet?
We can see from the most recent balance sheet that Altair Engineering had liabilities of US$149.5m falling due within a year, and liabilities of US$270.8m due beyond that. Offsetting this, it had US$245.4m in cash and US$98.0m in receivables that were due within 12 months. So its liabilities total US$76.9m more than the combination of its cash and short-term receivables.
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$4.65b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Altair Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Altair Engineering is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 315% gain in the last twelve months. 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 Altair Engineering's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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. Over the last three years, Altair Engineering actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
We could understand if investors are concerned about Altair Engineering's liabilities, but we can be reassured by the fact it has has net cash of US$29.9m. The cherry on top was that in converted 244% of that EBIT to free cash flow, bringing in US$23m. So is Altair Engineering's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Altair Engineering , 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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.