Does XPEL (NASDAQ:XPEL) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that XPEL, Inc. (NASDAQ:XPEL) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for XPEL

What Is XPEL's Net Debt?

As you can see below, XPEL had US$11.3m of debt at June 2024, down from US$13.0m a year prior. However, it does have US$15.0m in cash offsetting this, leading to net cash of US$3.65m.

How Strong Is XPEL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that XPEL had liabilities of US$31.0m due within 12 months and liabilities of US$28.9m due beyond that. On the other hand, it had cash of US$15.0m and US$30.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.2m.

Having regard to XPEL'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$1.12b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, XPEL also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that XPEL saw its EBIT decline by 4.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine XPEL'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 XPEL 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. In the last three years, XPEL's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about XPEL's liabilities, but we can be reassured by the fact it has has net cash of US$3.65m. So we don't have any problem with XPEL's use of debt. 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 1 warning sign for XPEL that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.