Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Nautilus, Inc. (NYSE:NLS) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Nautilus's Debt?
You can click the graphic below for the historical numbers, but it shows that Nautilus had US$13.3m of debt in March 2021, down from US$28.1m, one year before. However, its balance sheet shows it holds US$111.9m in cash, so it actually has US$98.6m net cash.
A Look At Nautilus' Liabilities
We can see from the most recent balance sheet that Nautilus had liabilities of US$137.8m falling due within a year, and liabilities of US$33.8m due beyond that. Offsetting this, it had US$111.9m in cash and US$88.7m in receivables that were due within 12 months. So it actually has US$28.9m more liquid assets than total liabilities.
This surplus suggests that Nautilus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nautilus boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Nautilus made a loss at the EBIT level, last year, it was also good to see that it generated US$139m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nautilus'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nautilus 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. Over the most recent year, Nautilus recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Nautilus has net cash of US$98.6m, as well as more liquid assets than liabilities. So we don't think Nautilus's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Nautilus you should be aware of, and 1 of them is a bit unpleasant.
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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