The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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. We note that Axon Enterprise, Inc. (NASDAQ:AXON) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Axon Enterprise
What Is Axon Enterprise’s Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Axon Enterprise had debt of US$675.5m, up from none in one year. However, it does have US$1.13b in cash offsetting this, leading to net cash of US$458.4m.
A Look At Axon Enterprise’s Liabilities
We can see from the most recent balance sheet that Axon Enterprise had liabilities of US$625.2m falling due within a year, and liabilities of US$1.01b due beyond that. Offsetting these obligations, it had cash of US$1.13b as well as receivables valued at US$627.4m due within 12 months. So it can boast US$128.9m more liquid assets than total liabilities.
This state of affairs indicates that Axon Enterprise’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the US$15.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Axon Enterprise boasts net cash, so it’s fair to say it does not have a heavy debt load!
Better yet, Axon Enterprise grew its EBIT by 710% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Axon Enterprise’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. Axon Enterprise may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Axon Enterprise actually produced more free cash flow than EBIT over the last two years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Axon Enterprise has net cash of US$458.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in US$110m. So we don’t think Axon Enterprise’s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Axon Enterprise has 3 warning signs we think you should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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.
