These 4 metrics indicate that Holdings (NASDAQ: ALRM) is using debt safely


Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a 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 note that Holdings, Inc. (NASDAQ: ALRM) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.

What is the debt of Holdings?

You can click on the graph below for historical figures, but it shows that as of June 2021, Holdings had a debt of $ 416.9 million, an increase from $ 112.0 million. , over one year. But it also has $ 662.7 million in cash to make up for that, which means it has $ 245.8 million in net cash.

NasdaqGS: ALRM History of debt to equity October 31, 2021

A look at the responsibilities of Holdings

According to the latest published balance sheet, Holdings had liabilities of US $ 104.1 million due within 12 months and liabilities of US $ 467.9 million due beyond 12 months. In compensation for these obligations, it had cash of US $ 662.7 million as well as receivables valued at US $ 92.6 million due within 12 months. So he actually has $ 183.3 million Following liquid assets as total liabilities.

This short-term liquidity is a sign that Holdings could likely repay its debt easily, as its balance sheet is far from tight. In short, Holdings has net cash, so it’s fair to say it doesn’t have a lot of debt!

And we also warmly note that Holdings increased its EBIT by 14% last year, which makes its debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Holdings can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although Holdings has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Holdings has recorded free cash flow totaling 92% of its EBIT, which is higher than what we usually expected. This positions it well to repay debt if it is desirable.

In summary

While we sympathize with investors who find the debt of concern, you should keep in mind that Holdings has net cash of US $ 245.8 million, as well as more liquid assets than of liabilities. And he impressed us with free cash flow of $ 83 million, or 92% of his EBIT. We therefore do not believe that Holdings’ use of debt is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Be aware that Holdings displays 2 warning signs in our investment analysis , and 1 of them should not be ignored …

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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