We Think Hooker Furnishings (NASDAQ:HOFT) Can Stay On Top Of Its Debt

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. We can see that Hooker Furnishings Corporation (NASDAQ:HOFT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hooker Furnishings

What Is Hooker Furnishings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hooker Furnishings had US$22.2m of debt in July 2024, down from US$23.6m, one year before. However, its balance sheet shows it holds US$42.1m in cash, so it actually has US$19.9m net cash.

How Strong Is Hooker Furnishings' Balance Sheet?

According to the last reported balance sheet, Hooker Furnishings had liabilities of US$66.5m due within 12 months, and liabilities of US$50.6m due beyond 12 months. Offsetting these obligations, it had cash of US$42.1m as well as receivables valued at US$45.9m due within 12 months. So its liabilities total US$29.2m more than the combination of its cash and short-term receivables.

Of course, Hooker Furnishings has a market capitalization of US$186.8m, so these liabilities are probably manageable. 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.

Shareholders should be aware that Hooker Furnishings's EBIT was down 92% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hooker Furnishings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hooker Furnishings 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 three years, Hooker Furnishings 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

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$19.9m. And it impressed us with free cash flow of US$5.1m, being 409% of its EBIT. So we are not troubled with Hooker Furnishings's debt use. 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. For example, we've discovered 1 warning sign for Hooker Furnishings that you should be aware of before investing here.

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.