Is USANA Health Sciences (NYSE:USNA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, USANA Health Sciences, Inc. (NYSE:USNA) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for USANA Health Sciences

How Much Debt Does USANA Health Sciences Carry?

As you can see below, at the end of April 2022, USANA Health Sciences had US$10.0m of debt, up from none a year ago. Click the image for more detail. However, it does have US$237.8m in cash offsetting this, leading to net cash of US$227.8m.

How Strong Is USANA Health Sciences' Balance Sheet?

According to the last reported balance sheet, USANA Health Sciences had liabilities of US$158.0m due within 12 months, and liabilities of US$25.0m due beyond 12 months. On the other hand, it had cash of US$237.8m and US$7.16m worth of receivables due within a year. So it can boast US$61.9m more liquid assets than total liabilities.

This short term liquidity is a sign that USANA Health Sciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that USANA Health Sciences has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, USANA Health Sciences's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if USANA Health Sciences 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. USANA Health Sciences may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, USANA Health Sciences produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case USANA Health Sciences has US$227.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$108m. So is USANA Health Sciences's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that USANA Health Sciences insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.