Is Nature's Sunshine Products (NASDAQ:NATR) Using Too Much Debt?

Simply Wall St

Fri, Apr 1, 2022, 6:53 PM 4 min read

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Nature's Sunshine Products, Inc. (NASDAQ:NATR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at 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$2.72m of debt at December 2021, down from US$4.92m a year prior. But on the other hand it also has US$86.2m in cash, leading to a US$83.5m net cash position.

debt-equity-history-analysis — NasdaqCM:NATR Debt to Equity History April 1st 2022

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

According to the last reported balance sheet, Nature's Sunshine Products had liabilities of US$76.7m due within 12 months, and liabilities of US$20.8m due beyond 12 months. Offsetting these obligations, it had cash of US$86.2m as well as receivables valued at US$8.87m due within 12 months. So its liabilities total US$2.42m more than the combination of its cash and short-term receivables.

Having regard to Nature's Sunshine Products' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$326.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Nature's Sunshine Products boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Nature's Sunshine Products has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Nature's Sunshine Products generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Nature's Sunshine Products has US$83.5m in net cash. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in US$28m. So we don't think Nature's Sunshine Products's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Nature's Sunshine Products , and understanding them should be part of your investment process.

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.

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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.