These 4 metrics indicate that Northwest Pipe (NASDAQ:NWPX) is using debt reasonably well

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Northwest Pipe Company (NASDAQ:NWPX) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Northwest Pipe

What is Northwest Pipe’s debt?

The image below, which you can click on for more details, shows that as of March 2022, Northwest Pipe had $90.3 million in debt, up from $8.24 million in one year. However, since he has a cash reserve of $3.30 million, his net debt is less, at around $87.0 million.

NasdaqGS: NWPX Debt to Equity History May 11, 2022

How healthy is Northwest Pipe’s balance sheet?

We can see from the most recent balance sheet that Northwest Pipe had liabilities of US$69.7 million maturing in one year, and liabilities of US$202.8 million beyond. In compensation for these obligations, it had cash of US$3.30 million as well as receivables valued at US$170.3 million and maturing within 12 months. Thus, its liabilities total $98.9 million more than the combination of its cash and short-term receivables.

Northwest Pipe has a market capitalization of US$295.7 million, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Northwest Pipe’s net debt to EBITDA ratio of approximately 2.4 suggests only moderate debt utilization. And its towering EBIT of 14.3 times its interest expense means that the debt burden is as light as a peacock feather. The bad news is that Northwest Pipe has seen its EBIT drop 13% over the past year. If income continues to decline at this rate, managing debt will be harder than taking three kids under 5 to a diner in fancy pants. 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 Northwest Pipe can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Northwest Pipe has produced strong free cash flow of 56% of EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

On the balance sheet, the most notable positive for Northwest Pipe is the fact that it appears to be able to cover its interest costs with its EBIT with confidence. However, our other observations were not so encouraging. To be precise, it seems about as good at (not) increasing your EBIT as wet socks are at keeping your feet warm. Looking at all this data, we feel a bit cautious about Northwest Pipe’s debt levels. While debt has its upside in higher potential returns, we think shareholders should certainly consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Northwest Pipe you should know.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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

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