We Think National Research (NASDAQ:NRC) Can Manage Its Debt With Ease
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that National Research Corporation (NASDAQ:NRC) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for National Research
What Is National Research's Net Debt?
You can click the graphic below for the historical numbers, but it shows that National Research had US$25.5m of debt in March 2022, down from US$29.6m, one year before. However, it does have US$47.3m in cash offsetting this, leading to net cash of US$21.8m.
A Look At National Research's Liabilities
According to the last reported balance sheet, National Research had liabilities of US$41.6m due within 12 months, and liabilities of US$30.1m due beyond 12 months. Offsetting this, it had US$47.3m in cash and US$16.1m in receivables that were due within 12 months. So it has liabilities totalling US$8.30m more than its cash and near-term receivables, combined.
This state of affairs indicates that National Research's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$819.9m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, National Research also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that National Research grew its EBIT by 14% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since National Research will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While National Research 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, National Research generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that National Research has US$21.8m in net cash. And it impressed us with free cash flow of US$33m, being 82% of its EBIT. So is National Research's debt a risk? It doesn't seem so to us. 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. Be aware that National Research is showing 3 warning signs in our investment analysis , you should know about...
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.
