Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies XPEL, Inc. (NASDAQ:XPEL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is XPEL's Debt?

As you can see below, XPEL had US$11.3m of debt at June 2024, down from US$13.0m a year prior. But it also has US$15.0m in cash to offset that, meaning it has US$3.65m net cash.

How Strong Is XPEL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that XPEL had liabilities of US$31.0m due within 12 months and liabilities of US$28.9m due beyond that. Offsetting these obligations, it had cash of US$15.0m as well as receivables valued at US$30.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.2m.

Having regard to XPEL's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.20b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, XPEL boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that XPEL saw its EBIT decline by 4.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine XPEL's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While XPEL 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. Looking at the most recent three years, XPEL recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about XPEL's liabilities, but we can be reassured by the fact it has has net cash of US$3.65m. So we don't have any problem with XPEL's use of debt. 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. Case in point: We've spotted 1 warning sign for XPEL you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.