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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Axon Enterprise, Inc. (NASDAQ:AXON) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Axon Enterprise had US$678.7m in debt in June 2024; about the same as the year before. But on the other hand it also has US$1.08b in cash, leading to a US$397.8m net cash position.

How Healthy Is Axon Enterprise's Balance Sheet?

We can see from the most recent balance sheet that Axon Enterprise had liabilities of US$766.1m falling due within a year, and liabilities of US$1.05b due beyond that. Offsetting this, it had US$1.08b in cash and US$729.5m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Axon Enterprise's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$31.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Axon Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Axon Enterprise has boosted its EBIT by 38%, 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 Axon Enterprise 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Axon Enterprise's liabilities, but we can be reassured by the fact it has has net cash of US$397.8m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$204m. So is Axon Enterprise'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Axon Enterprise , and understanding them should be part of your investment process.

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.