Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aptitude Software Group plc (LON:APTD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 December 2021, Aptitude Software Group had UK£9.89m of debt, up from none a year ago. Click the image for more detail. But it also has UK£29.1m in cash to offset that, meaning it has UK£19.2m net cash. debt-equity-history-analysis

A Look At Aptitude Software Group's Liabilities

The latest balance sheet data shows that Aptitude Software Group had liabilities of UK£41.5m due within a year, and liabilities of UK£18.5m falling due after that. On the other hand, it had cash of UK£29.1m and UK£11.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£19.0m.

Since publicly traded Aptitude Software Group shares are worth a total of UK£171.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aptitude Software Group also has more cash than debt, so we're pretty confident it can manage its debt safely.



The modesty of its debt load may become crucial for Aptitude Software Group if management cannot prevent a repeat of the 22% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aptitude Software Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Aptitude Software Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Aptitude Software Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£19.2m. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in UK£11m. So we are not troubled with Aptitude Software Group's debt use. 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. To that end, you should be aware of the  3 warning signs  we've spotted with Aptitude Software Group .

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.

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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.