David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Lawson Products, Inc. (NASDAQ: LAWS) uses debt in its business. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is Lawson Products’ net debt?
The image below, which you can click for more details, shows that as of June 2021, Lawson Products was in debt of $ 5.00 million, up from $ 1.71 million in a year. But it also has $ 5.86 million in cash to make up for that, which means it has $ 855.0,000 in net cash.
NasdaqGS: LAWS History of debt to equity October 27, 2021
How healthy is Lawson Products’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Lawson Products had liabilities of US $ 66.2 million due within 12 months and US $ 47.4 million liabilities beyond. In return, he had $ 5.86 million in cash and $ 53.8 million in receivables due within 12 months. Its liabilities therefore total $ 54.0 million more than the combination of its cash and short-term receivables.
Given that the listed Lawson Products shares are worth a total of US $ 459.7 million, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Lawson Products has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!
Modest indebtedness may become critical for Lawson Products if management cannot prevent a repeat of the 36% reduction in EBIT over the past year. Falling profits (if the trend continues) could eventually make even small debt risky enough. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Lawson Products’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Lawson Products may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Fortunately for all shareholders, Lawson Products has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Although Lawson Products has more liabilities than liquid assets, it also has net cash of $ 855.0,000. And he impressed us with free cash flow of US $ 29 million, or 124% of his EBIT. So we have no problem with Lawson Products’ use of debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Lawson products of which you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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