Yahoo Finance Is Nature's Sunshine Products (NASDAQ:NATR) A Risky Investment?
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 Nature's Sunshine Products, Inc. (NASDAQ:NATR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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.
View our latest analysis for Nature's Sunshine Products
What Is Nature's Sunshine Products's Net Debt?
As you can see below, Nature's Sunshine Products had US$1.80m of debt at June 2022, down from US$3.95m a year prior. However, its balance sheet shows it holds US$56.3m in cash, so it actually has US$54.5m net cash.
A Look At Nature's Sunshine Products' Liabilities
We can see from the most recent balance sheet that Nature's Sunshine Products had liabilities of US$69.1m falling due within a year, and liabilities of US$19.5m due beyond that. Offsetting this, it had US$56.3m in cash and US$10.5m in receivables that were due within 12 months. So it has liabilities totalling US$21.7m more than its cash and near-term receivables, combined.
Given Nature's Sunshine Products has a market capitalization of US$179.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
While Nature's Sunshine Products doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nature's Sunshine Products can strengthen its balance sheet over time. 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 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. Over the most recent three years, Nature's Sunshine Products recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While Nature's Sunshine Products does have more liabilities than liquid assets, it also has net cash of US$54.5m. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$7.0m. So we don't think Nature's Sunshine Products's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Nature's Sunshine Products that 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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