Is XPEL (NASDAQ:XPEL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that XPEL, Inc. (NASDAQ:XPEL) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for XPEL

What Is XPEL's Net Debt?

The image below, which you can click on for greater detail, shows that XPEL had debt of US$13.0m at the end of June 2023, a reduction from US$32.2m over a year. However, it does have US$14.3m in cash offsetting this, leading to net cash of US$1.30m.

A Look At XPEL's Liabilities

The latest balance sheet data shows that XPEL had liabilities of US$35.4m due within a year, and liabilities of US$28.0m falling due after that. On the other hand, it had cash of US$14.3m and US$24.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$25.1m.

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$2.05b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, XPEL 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 XPEL has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if XPEL can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, XPEL recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that XPEL has US$1.30m in net cash. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think XPEL's use of debt is risky. We'd be motivated to research the stock further if we found out that XPEL insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.