Does Natural Alternatives International (NASDAQ:NAII) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Natural Alternatives International, Inc. (NASDAQ:NAII) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Natural Alternatives International

What Is Natural Alternatives International's Net Debt?

As you can see below, Natural Alternatives International had US$9.93m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$19.4m in cash offsetting this, leading to net cash of US$9.42m.

A Look At Natural Alternatives International's Liabilities

The latest balance sheet data shows that Natural Alternatives International had liabilities of US$16.5m due within a year, and liabilities of US$26.5m falling due after that. Offsetting this, it had US$19.4m in cash and US$15.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.54m.

Given Natural Alternatives International has a market capitalization of US$62.2m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Natural Alternatives International boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Natural Alternatives International grew its EBIT by 137% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Natural Alternatives International 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 Natural Alternatives International 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, Natural Alternatives International saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Natural Alternatives International does have more liabilities than liquid assets, it also has net cash of US$9.42m. And we liked the look of last year's 137% year-on-year EBIT growth. So we don't have any problem with Natural Alternatives International's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Natural Alternatives International (2 can't be ignored!) that you should be aware of before investing here.

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.

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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.