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.' 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 Aptitude Software Group plc (LON:APTD) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Aptitude Software Group
How Much Debt Does Aptitude Software Group Carry?
As you can see below, at the end of June 2022, Aptitude Software Group had UK£9.90m of debt, up from none a year ago. Click the image for more detail. But it also has UK£23.6m in cash to offset that, meaning it has UK£13.7m net cash.
How Healthy Is Aptitude Software Group's Balance Sheet?
According to the last reported balance sheet, Aptitude Software Group had liabilities of UK£39.9m due within 12 months, and liabilities of UK£17.7m due beyond 12 months. Offsetting these obligations, it had cash of UK£23.6m as well as receivables valued at UK£16.7m due within 12 months. So its liabilities total UK£17.3m more than the combination of its cash and short-term receivables.
Since publicly traded Aptitude Software Group shares are worth a total of UK£235.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Aptitude Software Group boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Aptitude Software Group if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aptitude Software Group'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.