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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Alarm.com Holdings, Inc. (NASDAQ:ALRM) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 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 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. But on the other hand it also has US$1.17b in cash, leading to a US$188.6m net cash position.

How Healthy Is Alarm.com Holdings' Balance Sheet?

The latest balance sheet data shows that Alarm.com Holdings had liabilities of US$163.1m due within a year, and liabilities of US$1.08b falling due after that. 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.

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$3.11b 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alarm.com Holdings 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Alarm.com Holdings has net cash of US$188.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in US$178m. So is Alarm.com Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Alarm.com Holdings has 1 warning sign we think 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.