National Research (NASDAQ:NRC) 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.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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?

As you can see below, National Research had US$29.6m of debt at March 2021, down from US$33.2m a year prior. However, its balance sheet shows it holds US$43.5m in cash, so it actually has US$13.8m net cash.

How Strong Is National Research's Balance Sheet?

We can see from the most recent balance sheet that National Research had liabilities of US$36.9m falling due within a year, and liabilities of US$36.7m due beyond that. On the other hand, it had cash of US$43.5m and US$14.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$15.5m.

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$1.26b 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.

While National Research doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, National Research generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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$13.8m. And it impressed us with free cash flow of US$45m, being 90% of its EBIT. So we don't think National Research's use of debt is risky. 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. We've identified 2 warning signs with National Research , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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