We Think Smith-Midland (NASDAQ:SMID) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Smith-Midland Corporation (NASDAQ:SMID) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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$4.76m of debt in June 2025, down from US$5.41m, one year before. However, it does have US$7.10m in cash offsetting this, leading to net cash of US$2.34m.

A Look At Smith-Midland's Liabilities

According to the last reported balance sheet, Smith-Midland had liabilities of US$16.5m due within 12 months, and liabilities of US$15.4m due beyond 12 months. Offsetting these obligations, it had cash of US$7.10m as well as receivables valued at US$31.6m due within 12 months. So it actually has US$6.72m more liquid assets than total liabilities.

This surplus suggests that Smith-Midland has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Smith-Midland boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Smith-Midland

Even more impressive was the fact that Smith-Midland grew its EBIT by 151% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Smith-Midland will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Smith-Midland 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. Over the last two years, Smith-Midland reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Smith-Midland has US$2.34m in net cash and a decent-looking balance sheet. And we liked the look of last year's 151% year-on-year EBIT growth. So we don't think Smith-Midland's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Smith-Midland you should be aware of, and 1 of them shouldn't be ignored.

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.