Is Axon Enterprise (NASDAQ:AXON) Using Too Much Debt?

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 note that Axon Enterprise, Inc. (NASDAQ:AXON) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Axon Enterprise

What Is Axon Enterprise's Debt?

The chart below, which you can click on for greater detail, shows that Axon Enterprise had US$679.5m in debt in September 2024; about the same as the year before. But on the other hand it also has US$1.16b in cash, leading to a US$478.8m net cash position.

How Healthy Is Axon Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Axon Enterprise had liabilities of US$823.2m due within 12 months and liabilities of US$1.08b due beyond that. On the other hand, it had cash of US$1.16b and US$885.6m worth of receivables due within a year. So it can boast US$138.0m more liquid assets than total liabilities.

Having regard to Axon Enterprise'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$52.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Axon Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

Axon Enterprise's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Axon Enterprise'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Axon Enterprise 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. Happily for any shareholders, Axon Enterprise actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Axon Enterprise has US$478.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$220m, being 133% of its EBIT. So we don't think Axon Enterprise's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Axon Enterprise that you should be aware of.

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.