David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that AlerisLife Inc. (NASDAQ:ALR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for AlerisLife
How Much Debt Does AlerisLife Carry?
You can click the graphic below for the historical numbers, but it shows that AlerisLife had US$6.78m of debt in December 2021, down from US$7.17m, one year before. But it also has US$78.9m in cash to offset that, meaning it has US$72.1m net cash.
How Strong Is AlerisLife's Balance Sheet?
According to the last reported balance sheet, AlerisLife had liabilities of US$140.9m due within 12 months, and liabilities of US$53.8m due beyond 12 months. Offsetting these obligations, it had cash of US$78.9m as well as receivables valued at US$50.9m due within 12 months. So its liabilities total US$64.9m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$76.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, AlerisLife boasts net cash, so it's fair to say it does not have a heavy debt load! 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 AlerisLife'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.
Over 12 months, AlerisLife made a loss at the EBIT level, and saw its revenue drop to US$180m, which is a fall of 19%. We would much prefer see growth.