We Think Alarm.com Holdings (NASDAQ:ALRM) Can Manage Its Debt With Ease
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Alarm.com Holdings, Inc. (NASDAQ:ALRM) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Alarm.com Holdings
How Much Debt Does Alarm.com Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Alarm.com Holdings had US$110.0m of debt, an increase on US$63.0m, over one year. But on the other hand it also has US$253.5m in cash, leading to a US$143.5m net cash position.
How Healthy Is Alarm.com Holdings' Balance Sheet?
We can see from the most recent balance sheet that Alarm.com Holdings had liabilities of US$90.2m falling due within a year, and liabilities of US$163.0m due beyond that. Offsetting this, it had US$253.5m in cash and US$83.3m in receivables that were due within 12 months. So it actually has US$83.5m more liquid assets than total liabilities.
Having regard to Alarm.com Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.62b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Alarm.com Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Alarm.com Holdings has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alarm.com Holdings 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alarm.com Holdings 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. Over the last three years, Alarm.com Holdings recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Alarm.com Holdings has US$143.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$82m, being 82% of its EBIT. So is Alarm.com Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Alarm.com Holdings (1 is potentially serious) you should be aware of.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
