Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nature's Sunshine Products, Inc. (NASDAQ:NATR) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Nature's Sunshine Products's Net Debt?
The image below, which you can click on for greater detail, shows that Nature's Sunshine Products had debt of US$2.11m at the end of March 2022, a reduction from US$4.55m over a year. However, its balance sheet shows it holds US$66.5m in cash, so it actually has US$64.4m net cash.
How Strong Is Nature's Sunshine Products' Balance Sheet?
We can see from the most recent balance sheet that Nature's Sunshine Products had liabilities of US$68.4m falling due within a year, and liabilities of US$20.5m due beyond that. Offsetting this, it had US$66.5m in cash and US$7.27m in receivables that were due within 12 months. So it has liabilities totalling US$15.1m more than its cash and near-term receivables, combined.
Since publicly traded Nature's Sunshine Products shares are worth a total of US$305.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Nature's Sunshine Products boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Nature's Sunshine Products grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nature's Sunshine Products can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nature's Sunshine Products 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, Nature's Sunshine Products recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
We could understand if investors are concerned about Nature's Sunshine Products's liabilities, but we can be reassured by the fact it has has net cash of US$64.4m. And it impressed us with free cash flow of US$17m, being 85% of its EBIT. So we don't think Nature's Sunshine Products's use of debt is risky. 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. For example - Nature's Sunshine Products has 1 warning sign we think you should be aware of.
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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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.
Nature's Sunshine Products
Nature's Sunshine Products, Inc., a natural health and wellness company, manufactures and sells nutritional and personal care products in Asia, Europe, North America, Latin America, and internationally.
Flawless balance sheet with moderate growth potential.