Health Check: How Prudently Does Natural Alternatives International (NASDAQ:NAII) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Natural Alternatives International, Inc. (NASDAQ:NAII) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Natural Alternatives International's Debt?

The image below, which you can click on for greater detail, shows that Natural Alternatives International had debt of US$10.8m at the end of June 2025, a reduction from US$12.6m over a year. However, its balance sheet shows it holds US$12.3m in cash, so it actually has US$1.49m net cash.

How Strong Is Natural Alternatives International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Natural Alternatives International had liabilities of US$28.8m due within 12 months and liabilities of US$54.7m due beyond that. On the other hand, it had cash of US$12.3m and US$14.9m worth of receivables due within a year. So its liabilities total US$56.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$17.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Natural Alternatives International would probably need a major re-capitalization if its creditors were to demand repayment. Given that Natural Alternatives International has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is Natural Alternatives International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Natural Alternatives International

Over 12 months, Natural Alternatives International reported revenue of US$130m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Natural Alternatives International?

While Natural Alternatives International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Natural Alternatives International is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.