Lawson Products (NASDAQ:LAWS) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Lawson Products, Inc. (NASDAQ:LAWS) does carry debt. But the real question is whether this debt is making the company risky.

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lawson Products

How Much Debt Does Lawson Products Carry?

You can click the graphic below for the historical numbers, but it shows that Lawson Products had US$1.71m of debt in June 2020, down from US$8.82m, one year before. However, its balance sheet shows it holds US$10.0m in cash, so it actually has US$8.30m net cash.

How Healthy Is Lawson Products's Balance Sheet?

We can see from the most recent balance sheet that Lawson Products had liabilities of US$39.6m falling due within a year, and liabilities of US$37.1m due beyond that. Offsetting these obligations, it had cash of US$10.0m as well as receivables valued at US$40.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$26.6m.

Of course, Lawson Products has a market capitalization of US$415.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lawson Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Lawson Products grew its EBIT by 130% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lawson 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, a company can only pay off debt with cold hard cash, not accounting profits. While Lawson 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. Happily for any shareholders, Lawson Products actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Lawson Products's liabilities, but we can be reassured by the fact it has has net cash of US$8.30m. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$17m. So we don't think Lawson Products's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Lawson Products that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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.

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