Does Joint (NASDAQ:JYNT) Have A Healthy Balance Sheet?

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.' 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. As with many other companies The Joint Corp. (NASDAQ:JYNT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

Check out our latest analysis for Joint

How Much Debt Does Joint Carry?

The image below, which you can click on for greater detail, shows that Joint had debt of US$2.00m at the end of September 2021, a reduction from US$4.73m over a year. However, it does have US$19.5m in cash offsetting this, leading to net cash of US$17.5m.

How Healthy Is Joint's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Joint had liabilities of US$21.5m due within 12 months and liabilities of US$30.4m due beyond that. On the other hand, it had cash of US$19.5m and US$2.92m worth of receivables due within a year. So it has liabilities totalling US$29.4m more than its cash and near-term receivables, combined.

Given Joint has a market capitalization of US$721.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Joint also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Joint grew its EBIT by 103% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Joint 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Joint 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, Joint 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

We could understand if investors are concerned about Joint's liabilities, but we can be reassured by the fact it has has net cash of US$17.5m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in US$8.1m. So is Joint'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. For example, we've discovered 2 warning signs for Joint that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.