Nature's Sunshine Products (NASDAQ:NATR) Could Easily Take On More 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 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 Nature's Sunshine Products, Inc. (NASDAQ:NATR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Nature's Sunshine Products
What Is Nature's Sunshine Products's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Nature's Sunshine Products had debt of US$6.91m, up from US$1.59m in one year. But on the other hand it also has US$70.3m in cash, leading to a US$63.3m net cash position.
A Look At Nature's Sunshine Products's Liabilities
According to the last reported balance sheet, Nature's Sunshine Products had liabilities of US$61.9m due within 12 months, and liabilities of US$25.8m due beyond 12 months. Offsetting this, it had US$70.3m in cash and US$7.08m in receivables that were due within 12 months. So it has liabilities totalling US$10.4m more than its cash and near-term receivables, combined.
Given Nature's Sunshine Products has a market capitalization of US$209.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nature's Sunshine Products also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Nature's Sunshine Products grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nature's Sunshine Products's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Nature's Sunshine Products 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, Nature's Sunshine Products 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 look at a company's total liabilities, it is very reassuring that Nature's Sunshine Products has US$63.3m in net cash. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in US$20m. So we don't think Nature's Sunshine Products's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Nature's Sunshine Products that 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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