The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Alto Ingredients, Inc. (NASDAQ:ALTO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Alto Ingredients

What Is Alto Ingredients's Net Debt?

As you can see below, at the end of June 2023, Alto Ingredients had US$82.1m of debt, up from US$52.5m a year ago. Click the image for more detail. However, because it has a cash reserve of US$22.7m, its net debt is less, at about US$59.3m.

A Look At Alto Ingredients' Liabilities

According to the last reported balance sheet, Alto Ingredients had liabilities of US$58.7m due within 12 months, and liabilities of US$111.9m due beyond 12 months. On the other hand, it had cash of US$22.7m and US$63.4m worth of receivables due within a year. So its liabilities total US$84.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Alto Ingredients is worth US$350.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alto Ingredients can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Alto Ingredients made a loss at the EBIT level, and saw its revenue drop to US$1.3b, which is a fall of 4.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Alto Ingredients had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$58m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$74m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 1 warning sign we've spotted with Alto Ingredients .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.