These 4 Measures Indicate That Nature's Sunshine Products (NASDAQ:NATR) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Nature's Sunshine Products, Inc. (NASDAQ:NATR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nature's Sunshine Products

How Much Debt Does Nature's Sunshine Products Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Nature's Sunshine Products had debt of US$4.92m, up from US$1.52m in one year. However, its balance sheet shows it holds US$92.1m in cash, so it actually has US$87.1m net cash.

How Strong Is Nature's Sunshine Products' Balance Sheet?

We can see from the most recent balance sheet that Nature's Sunshine Products had liabilities of US$69.7m falling due within a year, and liabilities of US$22.6m due beyond that. On the other hand, it had cash of US$92.1m and US$7.38m worth of receivables due within a year. So it actually has US$7.18m more liquid assets than total liabilities.

This state of affairs indicates that Nature's Sunshine Products' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$387.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Nature's Sunshine Products has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Nature's Sunshine Products has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Nature's Sunshine Products has net cash of US$87.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$33m, being 117% of its EBIT. 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. Be aware that Nature's Sunshine Products is showing 1 warning sign in our investment analysis , you should know about...

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.

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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