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.' 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. Importantly, Alteryx, Inc. (NYSE:AYX) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.
What Is Alteryx's Debt?
As you can see below, at the end of March 2020, Alteryx had US$706.2m of debt, up from US$176.3m a year ago. Click the image for more detail. But it also has US$762.9m in cash to offset that, meaning it has US$56.8m net cash.
A Look At Alteryx's Liabilities
According to the last reported balance sheet, Alteryx had liabilities of US$214.1m due within 12 months, and liabilities of US$682.9m due beyond 12 months. Offsetting these obligations, it had cash of US$762.9m as well as receivables valued at US$80.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$53.6m.
Having regard to Alteryx's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$11.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Alteryx also has more cash than debt, so we're pretty confident it can manage its debt safely.
Alteryx grew its EBIT by 4.8% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 Alteryx'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Alteryx has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Alteryx generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Alteryx has US$56.8m in net cash. And it impressed us with free cash flow of US$23m, being 97% of its EBIT. So we don't have any problem with Alteryx's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Alteryx (1 is a bit unpleasant) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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