Is National Research (NASDAQ:NRC) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that National Research Corporation (NASDAQ:NRC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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

How Much Debt Does National Research Carry?

The image below, which you can click on for greater detail, shows that National Research had debt of US$28.6m at the end of June 2021, a reduction from US$32.6m over a year. However, it does have US$48.9m in cash offsetting this, leading to net cash of US$20.3m.

A Look At National Research's Liabilities

We can see from the most recent balance sheet that National Research had liabilities of US$40.0m falling due within a year, and liabilities of US$35.5m due beyond that. On the other hand, it had cash of US$48.9m and US$14.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$12.1m.

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$1.17b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, National Research boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that National Research grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since National Research will need earnings to service that debt. 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. National Research 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 last three years, National Research recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that National Research has US$20.3m in net cash. And it impressed us with free cash flow of US$47m, being 88% of its EBIT. So we don't think National Research's use of debt is risky. 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. We've identified 1 warning sign with National Research , and understanding them should be part of your investment process.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.