NCS Multistage Holdings (NASDAQ:NCSM) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that NCS Multistage Holdings, Inc. (NASDAQ:NCSM) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NCS Multistage Holdings

What Is NCS Multistage Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 NCS Multistage Holdings had debt of US$8.14m, up from none in one year. However, it does have US$25.9m in cash offsetting this, leading to net cash of US$17.7m.

How Strong Is NCS Multistage Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NCS Multistage Holdings had liabilities of US$25.4m due within 12 months and liabilities of US$11.3m due beyond that. On the other hand, it had cash of US$25.9m and US$36.7m worth of receivables due within a year. So it actually has US$25.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that NCS Multistage Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that NCS Multistage Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, NCS Multistage Holdings turned things around in the last 12 months, delivering and EBIT of US$4.3m. 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 NCS Multistage Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NCS Multistage Holdings 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, NCS Multistage Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case NCS Multistage Holdings has US$17.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 262% of that EBIT to free cash flow, bringing in US$11m. So is NCS Multistage Holdings's debt a risk? It doesn't seem so to us. 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. For example - NCS Multistage Holdings has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.