Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Allot Ltd. (NASDAQ:ALLT) has debt on its balance sheet. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Allot
What is Allot’s debt?
The image below, which you can click on for more details, shows that in March 2022, Allot had $39.4 million in debt, up from none in a year. But he also has $115.5 million in cash to offset that, meaning he has a net cash of $76.1 million.
How healthy is Allot’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Allot had liabilities of US$55.7 million due within 12 months and liabilities of US$59.3 million due beyond. In return, he had $115.5 million in cash and $40.8 million in receivables due within 12 months. So he actually has 41.4 million US dollars After liquid assets than total liabilities.
It’s good to see that Allot has plenty of cash on its balance sheet, suggesting careful liability management. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Simply put, the fact that Allot has more cash than debt is probably a good indication that he can safely manage his debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Allot can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Allot was not profitable in terms of EBIT, but managed to increase its turnover by 6.2%, to 146 million dollars. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
So how risky is attribution?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that Allot has posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned $26 million in cash and suffered a loss of $17 million. With just $76.1 million on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Allot.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.