Nu Skin Enterprises (NYSE:NUS) Has A Somewhat Strained Balance Sheet

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. We note that Nu Skin Enterprises, Inc. (NYSE:NUS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nu Skin Enterprises

What Is Nu Skin Enterprises's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Nu Skin Enterprises had US$502.9m of debt, an increase on US$424.8m, over one year. However, it does have US$260.2m in cash offsetting this, leading to net debt of about US$242.7m.

How Strong Is Nu Skin Enterprises' Balance Sheet?

According to the last reported balance sheet, Nu Skin Enterprises had liabilities of US$434.0m due within 12 months, and liabilities of US$536.9m due beyond 12 months. Offsetting this, it had US$260.2m in cash and US$77.3m in receivables that were due within 12 months. So it has liabilities totalling US$633.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$900.2m, so it does suggest shareholders should keep an eye on Nu Skin Enterprises' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Nu Skin Enterprises's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 19.9 times, makes us even more comfortable. It is just as well that Nu Skin Enterprises's load is not too heavy, because its EBIT was down 53% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nu Skin Enterprises can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Nu Skin Enterprises's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

We'd go so far as to say Nu Skin Enterprises's EBIT growth rate was disappointing. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Nu Skin Enterprises stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nu Skin Enterprises is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.