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 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. We note that NCS Multistage Holdings, Inc. (NASDAQ:NCSM) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is NCS Multistage Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that NCS Multistage Holdings had US$15.0m of debt in June 2020, down from US$16.0m, one year before. But on the other hand it also has US$31.3m in cash, leading to a US$16.3m net cash position.
How Strong Is NCS Multistage Holdings's Balance Sheet?
We can see from the most recent balance sheet that NCS Multistage Holdings had liabilities of US$13.0m falling due within a year, and liabilities of US$27.0m due beyond that. Offsetting these obligations, it had cash of US$31.3m as well as receivables valued at US$17.9m due within 12 months. So it actually has US$9.18m more liquid assets than total liabilities.
This surplus liquidity suggests that NCS Multistage Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, NCS Multistage Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that NCS Multistage Holdings's EBIT was down 70% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NCS Multistage Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NCS Multistage 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, NCS Multistage 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.
While we empathize with investors who find debt concerning, you should keep in mind that NCS Multistage Holdings has net cash of US$16.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 235% of that EBIT to free cash flow, bringing in US$29m. So we are not troubled with NCS Multistage 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 NCS Multistage Holdings you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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