Smith-Midland (NASDAQ:SMID) Seems To Use Debt Quite Sensibly

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 Smith-Midland Corporation (NASDAQ:SMID) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 Smith-Midland

How Much Debt Does Smith-Midland Carry?

You can click the graphic below for the historical numbers, but it shows that Smith-Midland had US$5.28m of debt in September 2024, down from US$5.89m, one year before. But it also has US$9.01m in cash to offset that, meaning it has US$3.73m net cash.

How Healthy Is Smith-Midland's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Smith-Midland had liabilities of US$12.6m due within 12 months and liabilities of US$13.7m due beyond that. Offsetting these obligations, it had cash of US$9.01m as well as receivables valued at US$18.8m due within 12 months. So it can boast US$1.48m more liquid assets than total liabilities.

This state of affairs indicates that Smith-Midland's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$233.6m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Smith-Midland has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Smith-Midland grew its EBIT by 1,608% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Smith-Midland'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Smith-Midland 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. During the last three years, Smith-Midland burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Smith-Midland has net cash of US$3.73m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 1,608% over the last year. So we don't have any problem with Smith-Midland's use of 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. For instance, we've identified 1 warning sign for Smith-Midland that you should be aware of.

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.