Is Alarm.com Holdings (NASDAQ:ALRM) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Alarm.com Holdings, Inc. (NASDAQ:ALRM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Alarm.com Holdings

What Is Alarm.com Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Alarm.com Holdings had US$489.6m of debt, an increase on US$421.1m, over one year. However, it does have US$621.3m in cash offsetting this, leading to net cash of US$131.8m.

How Strong Is Alarm.com Holdings' Balance Sheet?

The latest balance sheet data shows that Alarm.com Holdings had liabilities of US$151.1m due within a year, and liabilities of US$541.8m falling due after that. On the other hand, it had cash of US$621.3m and US$118.8m worth of receivables due within a year. So it actually has US$47.2m more liquid assets than total liabilities.

Having regard to Alarm.com Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.37b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Alarm.com Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Alarm.com Holdings's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alarm.com Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Alarm.com Holdings 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, Alarm.com Holdings recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alarm.com Holdings has US$131.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$7.8m, being 85% of its EBIT. So we are not troubled with Alarm.com Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Alarm.com Holdings you should be aware of, and 1 of them is potentially serious.

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.