Hooker Furnishings (NASDAQ:HOFT) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hooker Furnishings Corporation (NASDAQ:HOFT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Hooker Furnishings

How Much Debt Does Hooker Furnishings Carry?

The image below, which you can click on for greater detail, shows that Hooker Furnishings had debt of US$22.9m at the end of January 2024, a reduction from US$24.3m over a year. However, its balance sheet shows it holds US$43.2m in cash, so it actually has US$20.3m net cash.

How Strong Is Hooker Furnishings' Balance Sheet?

According to the last reported balance sheet, Hooker Furnishings had liabilities of US$41.4m due within 12 months, and liabilities of US$76.2m due beyond 12 months. On the other hand, it had cash of US$43.2m and US$54.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$20.2m.

Since publicly traded Hooker Furnishings shares are worth a total of US$183.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hooker Furnishings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Hooker Furnishings's load is not too heavy, because its EBIT was down 32% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hooker Furnishings'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. Hooker Furnishings 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. During the last three years, Hooker Furnishings produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Hooker Furnishings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$20.3m. And it impressed us with free cash flow of US$49m, being 77% of its EBIT. So we don't have any problem with Hooker Furnishings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hooker Furnishings , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.