Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 can see that Nu Skin Enterprises, Inc. (NYSE:NUS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Nu Skin Enterprises Carry?
The image below, which you can click on for greater detail, shows that at September 2021 Nu Skin Enterprises had debt of US$388.7m, up from US$342.7m in one year. However, it does have US$301.6m in cash offsetting this, leading to net debt of about US$87.1m.
How Healthy Is Nu Skin Enterprises’ Balance Sheet?
The latest balance sheet data shows that Nu Skin Enterprises had liabilities of US$540.6m due within a year, and liabilities of US$497.3m falling due after that. Offsetting this, it had US$301.6m in cash and US$52.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$683.9m.
This deficit isn’t so bad because Nu Skin Enterprises is worth US$2.30b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Nu Skin Enterprises’s net debt is only 0.23 times its EBITDA. And its EBIT covers its interest expense a whopping 22.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Nu Skin Enterprises grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nu Skin Enterprises can strengthen its balance sheet over time.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Nu Skin Enterprises produced sturdy free cash flow equating to 56% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Nu Skin Enterprises’s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. And that’s just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, Nu Skin Enterprises seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity.