Does National Research (NASDAQ:NRC) 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. We note that National Research Corporation (NASDAQ:NRC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for National Research

What Is National Research's Debt?

As you can see below, National Research had US$22.2m of debt at December 2022, down from US$26.5m a year prior. But on the other hand it also has US$25.0m in cash, leading to a US$2.85m net cash position.

How Healthy Is National Research's Balance Sheet?

According to the last reported balance sheet, National Research had liabilities of US$33.4m due within 12 months, and liabilities of US$25.0m due beyond 12 months. Offsetting this, it had US$25.0m in cash and US$15.3m in receivables that were due within 12 months. So it has liabilities totalling US$18.1m more than its cash and near-term receivables, combined.

Having regard to National Research's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.11b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, National Research also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that National Research saw its EBIT decline by 8.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is National Research's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While National Research 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 most recent three years, National Research recorded free cash flow worth 74% 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 Research's liabilities, but we can be reassured by the fact it has has net cash of US$2.85m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in US$26m. So is National Research's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that National Research is showing 2 warning signs in our investment analysis , you should know about...

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.