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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Altair Engineering Inc. (NASDAQ:ALTR) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Altair Engineering
What Is Altair Engineering’s Debt?
As you can see below, at the end of September 2022, Altair Engineering had US$305.2m of debt, up from US$196.8m a year ago. Click the image for more detail. However, it does have US$311.9m in cash offsetting this, leading to net cash of US$6.70m.
How Strong Is Altair Engineering’s Balance Sheet?
According to the last reported balance sheet, Altair Engineering had liabilities of US$198.5m due within 12 months, and liabilities of US$390.9m due beyond 12 months. On the other hand, it had cash of US$311.9m and US$133.4m worth of receivables due within a year. So its liabilities total US$144.2m more than the combination of its cash and short-term receivables.
Of course, Altair Engineering has a market capitalization of US$3.81b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Altair Engineering also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Altair Engineering wasn’t profitable at an EBIT level, but managed to grow its revenue by 5.3%, to US$553m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Altair Engineering?
While Altair Engineering lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$24m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we’re a bit cautious of the stock, not least because of the rather modest revenue growth. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 2 warning signs for Altair Engineering you should be aware of.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Valuation is complex, but we’re helping make it simple.
Find out whether Altair Engineering is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
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