Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies National Beverage Corp. (NASDAQ:FIZZ) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is National Beverage's Debt?
You can click the graphic below for the historical numbers, but it shows that as of April 2022 National Beverage had US$30.0m of debt, an increase on none, over one year. But it also has US$48.1m in cash to offset that, meaning it has US$18.1m net cash.
How Strong Is National Beverage's Balance Sheet?
We can see from the most recent balance sheet that National Beverage had liabilities of US$145.3m falling due within a year, and liabilities of US$83.0m due beyond that. Offsetting this, it had US$48.1m in cash and US$93.6m in receivables that were due within 12 months. So it has liabilities totalling US$86.7m more than its cash and near-term receivables, combined.
Having regard to National Beverage's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.57b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, National Beverage also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, National Beverage saw its EBIT drop by 8.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 National Beverage'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While National Beverage 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. Over the most recent three years, National Beverage recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to look at a company's total liabilities, it is very reassuring that National Beverage has US$18.1m in net cash. And it impressed us with free cash flow of US$104m, being 71% of its EBIT. So we are not troubled with National Beverage's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for National Beverage you should be aware of, and 1 of them shouldn't be ignored.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.