Alarm.com Holdings (NASDAQ: ALRM) could easily take on more debt
David Iben expressed it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Alarm.com Holdings, Inc. (NASDAQ: ALRM) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. 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 think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Alarm.com Holdings
What is the debt of Alarm.com Holdings?
As you can see below, at the end of June 2021, Alarm.com Holdings was in debt of $ 416.9 million, up from $ 112.0 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds $ 662.7 million in cash, so he actually has $ 245.8 million in net cash.
How healthy is Alarm.com Holdings’ balance sheet?
We can see from the most recent balance sheet that Alarm.com Holdings had a liability of US $ 104.1 million due within one year and a liability of US $ 467.9 million due to- of the. On the other hand, it had US $ 662.7 million in cash and US $ 92.6 million in receivables due within one year. He can therefore avail himself of $ 183.3 million in liquid assets more than total Liabilities.
This surplus suggests that Alarm.com Holdings has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that Alarm.com Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
And we also warmly note that Alarm.com Holdings increased its EBIT by 14% last year, which makes its debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine the ability of Alarm.com Holdings to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. Alarm.com Holdings may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. and its ability to manage debt. Over the past three years, Alarm.com Holdings has generated free cash flow of a very solid 92% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
While it’s always a good idea to investigate a company’s debt, in this case Alarm.com Holdings has US $ 245.8 million in net cash and a decent looking balance sheet. And he impressed us with free cash flow of $ 83 million, or 92% of his EBIT. We therefore do not believe that Alarm.com Holdings’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Alarm.com Holdings displays 2 warning signs in our investment analysis , and 1 of them is a bit rude …
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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