Is Northwest Pipe (NASDAQ:NWPX) A Risky Investment?

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.' 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. Importantly, Northwest Pipe Company (NASDAQ:NWPX) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Northwest Pipe

What Is Northwest Pipe's Debt?

As you can see below, at the end of September 2020, Northwest Pipe had US$14.4m of debt, up from none a year ago. Click the image for more detail. However, it does have US$30.4m in cash offsetting this, leading to net cash of US$16.0m.

A Look At Northwest Pipe's Liabilities

The latest balance sheet data shows that Northwest Pipe had liabilities of US$37.7m due within a year, and liabilities of US$65.4m falling due after that. Offsetting these obligations, it had cash of US$30.4m as well as receivables valued at US$119.9m due within 12 months. So it actually has US$47.1m more liquid assets than total liabilities.

It's good to see that Northwest Pipe has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Northwest Pipe 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 Northwest Pipe has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Northwest Pipe'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. While Northwest Pipe 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. Over the last two years, Northwest Pipe actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Northwest Pipe has net cash of US$16.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$52m, being 114% of its EBIT. The bottom line is that we do not find Northwest Pipe's debt levels at all concerning. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Northwest Pipe's earnings per share history 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. 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.
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