These 4 Measures Indicate That Axon Enterprise (NASDAQ:AXON) Is Using Debt Safely

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.' 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 note that Axon Enterprise, Inc. (NASDAQ:AXON) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Axon Enterprise

How Much Debt Does Axon Enterprise Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Axon Enterprise had debt of US$676.3m, up from none in one year. But it also has US$1.19b in cash to offset that, meaning it has US$514.3m net cash.

How Strong Is Axon Enterprise's Balance Sheet?

We can see from the most recent balance sheet that Axon Enterprise had liabilities of US$717.8m falling due within a year, and liabilities of US$1.02b due beyond that. On the other hand, it had cash of US$1.19b and US$703.4m worth of receivables due within a year. So it actually has US$160.9m 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$19.2b 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.

Better yet, Axon Enterprise grew its EBIT by 216% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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 Axon Enterprise 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. Happily for any shareholders, Axon Enterprise actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Axon Enterprise has net cash of US$514.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in US$132m. So we don't think Axon Enterprise's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.