These 4 Measures Indicate That Daktronics (NASDAQ:DAKT) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Daktronics, Inc. (NASDAQ:DAKT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Daktronics

What Is Daktronics's Debt?

As you can see below, at the end of October 2023, Daktronics had US$56.6m of debt, up from US$26.4m a year ago. Click the image for more detail. However, it does have US$65.3m in cash offsetting this, leading to net cash of US$8.70m.

How Healthy Is Daktronics' Balance Sheet?

According to the last reported balance sheet, Daktronics had liabilities of US$189.9m due within 12 months, and liabilities of US$97.8m due beyond 12 months. On the other hand, it had cash of US$65.3m and US$161.0m worth of receivables due within a year. So its liabilities total US$61.4m more than the combination of its cash and short-term receivables.

Since publicly traded Daktronics shares are worth a total of US$391.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Daktronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Daktronics turned things around in the last 12 months, delivering and EBIT of US$90m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daktronics will need earnings to service that debt. 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 Daktronics 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 year, Daktronics produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Daktronics does have more liabilities than liquid assets, it also has net cash of US$8.70m. And it impressed us with free cash flow of US$63m, being 70% of its EBIT. So we don't think Daktronics's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Daktronics's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.