Is Natural Alternatives International (NASDAQ:NAII) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Natural Alternatives International, Inc. (NASDAQ:NAII) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Natural Alternatives International

How Much Debt Does Natural Alternatives International Carry?

The image below, which you can click on for greater detail, shows that Natural Alternatives International had debt of US$9.30m at the end of March 2024, a reduction from US$18.7m over a year. However, it does have US$12.4m in cash offsetting this, leading to net cash of US$3.11m.

How Healthy Is Natural Alternatives International's Balance Sheet?

The latest balance sheet data shows that Natural Alternatives International had liabilities of US$13.6m due within a year, and liabilities of US$55.5m falling due after that. Offsetting these obligations, it had cash of US$12.4m as well as receivables valued at US$12.9m due within 12 months. So its liabilities total US$43.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$33.8m, we think shareholders really should watch Natural Alternatives International's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Natural Alternatives International boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Natural Alternatives International'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.

In the last year Natural Alternatives International had a loss before interest and tax, and actually shrunk its revenue by 30%, to US$120m. That makes us nervous, to say the least.

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$6.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. 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. We've identified 3 warning signs with Natural Alternatives International (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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@simplywallst.com