Is National Instruments (NASDAQ:NATI) A Risky Investment?
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.' 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. Importantly, National Instruments Corporation (NASDAQ:NATI) does carry debt. But should shareholders be worried about its use of debt?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for National Instruments
What Is National Instruments's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 National Instruments had debt of US$88.5m, up from none in one year. However, it does have US$608.3m in cash offsetting this, leading to net cash of US$519.8m.
How Strong Is National Instruments's Balance Sheet?
The latest balance sheet data shows that National Instruments had liabilities of US$334.8m due within a year, and liabilities of US$245.3m falling due after that. On the other hand, it had cash of US$608.3m and US$211.8m worth of receivables due within a year. So it can boast US$239.9m more liquid assets than total liabilities.
This short term liquidity is a sign that National Instruments could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, National Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, National Instruments's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 National Instruments'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While National Instruments 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, National Instruments 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 it is always sensible to investigate a company's debt, in this case National Instruments has US$519.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$168m, being 108% of its EBIT. So is National Instruments's debt a risk? It doesn't seem so to us. 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 example, we've discovered 3 warning signs for National Instruments (1 shouldn't be ignored!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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