These 4 Measures Indicate That Alarm.com Holdings (NASDAQ:ALRM) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 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.

Check out our latest analysis for Alarm.com Holdings

What Is Alarm.com Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Alarm.com Holdings had debt of US$982.0m, up from US$492.7m in one year. However, it does have US$1.17b in cash offsetting this, leading to net cash of US$188.6m.

How Strong Is Alarm.com Holdings' Balance Sheet?

According to the last reported balance sheet, Alarm.com Holdings had liabilities of US$163.1m due within 12 months, and liabilities of US$1.08b due beyond 12 months. On the other hand, it had cash of US$1.17b and US$121.0m worth of receivables due within a year. So it can boast US$51.5m more liquid assets than total liabilities.

This state of affairs indicates that Alarm.com Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Alarm.com Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Alarm.com Holdings has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alarm.com Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, Alarm.com Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alarm.com Holdings has US$188.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in US$178m. So we don't think Alarm.com Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alarm.com Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.