Northwest Pipe (NASDAQ:NWPX) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 Northwest Pipe Company (NASDAQ:NWPX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.

Check out our latest analysis for Northwest Pipe

How Much Debt Does Northwest Pipe Carry?

The image below, which you can click on for greater detail, shows that Northwest Pipe had debt of US$8.24m at the end of March 2021, a reduction from US$15.9m over a year. However, it does have US$29.9m in cash offsetting this, leading to net cash of US$21.7m.

How Healthy Is Northwest Pipe's Balance Sheet?

We can see from the most recent balance sheet that Northwest Pipe had liabilities of US$35.4m falling due within a year, and liabilities of US$59.6m due beyond that. Offsetting these obligations, it had cash of US$29.9m as well as receivables valued at US$115.7m due within 12 months. So it can boast US$50.6m more liquid assets than total liabilities.

This excess liquidity suggests that Northwest Pipe is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Northwest Pipe boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Northwest Pipe has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Northwest Pipe 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. Northwest Pipe 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, Northwest Pipe actually produced more free cash flow than EBIT over the last two years. 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$21.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$42m, being 138% of its EBIT. So we don't think Northwest Pipe's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Northwest Pipe, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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