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. As with many other companies Napco Security Technologies, Inc. (NASDAQ:NSSC) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Napco Security Technologies
What Is Napco Security Technologies's Net Debt?
The chart below, which you can click on for greater detail, shows that Napco Security Technologies had US$3.90m in debt in June 2021; about the same as the year before. But it also has US$40.2m in cash to offset that, meaning it has US$36.3m net cash.
How Healthy Is Napco Security Technologies' Balance Sheet?
The latest balance sheet data shows that Napco Security Technologies had liabilities of US$20.2m due within a year, and liabilities of US$9.88m falling due after that. On the other hand, it had cash of US$40.2m and US$28.1m worth of receivables due within a year. So it can boast US$38.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Napco Security Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Napco Security Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Napco Security Technologies has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. 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 Napco Security Technologies'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Napco Security Technologies 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 three years, Napco Security Technologies generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case Napco Security Technologies has US$36.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$22m, being 86% of its EBIT. So is Napco Security Technologies's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Napco Security Technologies would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
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.
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