Is National Beverage (NASDAQ:FIZZ) A Risky Investment?

Warren Buffett famously said, '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 note that National Beverage Corp. (NASDAQ:FIZZ) 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for National Beverage

How Much Debt Does National Beverage Carry?

The image below, which you can click on for greater detail, shows that at April 2022 National Beverage had debt of US$30.0m, up from none in one year. But on the other hand it also has US$48.1m in cash, leading to a US$18.1m net cash position.

How Strong Is National Beverage's Balance Sheet?

According to the last reported balance sheet, National Beverage had liabilities of US$145.3m due within 12 months, and liabilities of US$83.0m due beyond 12 months. Offsetting these obligations, it had cash of US$48.1m as well as receivables valued at US$93.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$86.7m.

This state of affairs indicates that National Beverage's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.57b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, National Beverage also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, National Beverage saw its EBIT drop by 8.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 National Beverage'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. National Beverage 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 three years, National Beverage recorded free cash flow worth 71% 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.

Summing up

We could understand if investors are concerned about National Beverage's liabilities, but we can be reassured by the fact it has has net cash of US$18.1m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in US$104m. So we don't have any problem with National Beverage'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. For example National Beverage has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.