Lifeway Foods (NASDAQ:LWAY) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Lifeway Foods, Inc. (NASDAQ:LWAY) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lifeway Foods

What Is Lifeway Foods's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lifeway Foods had US$5.76m of debt in September 2023, down from US$6.50m, one year before. However, it does have US$12.6m in cash offsetting this, leading to net cash of US$6.87m.

A Look At Lifeway Foods' Liabilities

According to the last reported balance sheet, Lifeway Foods had liabilities of US$16.4m due within 12 months, and liabilities of US$7.67m due beyond 12 months. Offsetting this, it had US$12.6m in cash and US$13.4m in receivables that were due within 12 months. So it can boast US$1.91m more liquid assets than total liabilities.

This state of affairs indicates that Lifeway Foods' 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$251.1m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Lifeway Foods has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Lifeway Foods grew its EBIT by 1,565% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lifeway Foods'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. Lifeway Foods 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, Lifeway Foods produced sturdy free cash flow equating to 67% 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

While we empathize with investors who find debt concerning, you should keep in mind that Lifeway Foods has net cash of US$6.87m, as well as more liquid assets than liabilities. And we liked the look of last year's 1,565% year-on-year EBIT growth. So is Lifeway Foods's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Lifeway Foods .

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.