Is Fastenal (NASDAQ:FAST) Using Too Much Debt?

Simply Wall St · 07/01 10:26

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Fastenal Company (NASDAQ:FAST) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Fastenal

How Much Debt Does Fastenal Carry?

You can click the graphic below for the historical numbers, but it shows that Fastenal had US$200.0m of debt in March 2024, down from US$400.0m, one year before. However, it does have US$237.1m in cash offsetting this, leading to net cash of US$37.1m.

NasdaqGS:FAST Debt to Equity History July 1st 2024

How Strong Is Fastenal's Balance Sheet?

According to the last reported balance sheet, Fastenal had liabilities of US$637.9m due within 12 months, and liabilities of US$465.6m due beyond 12 months. Offsetting these obligations, it had cash of US$237.1m as well as receivables valued at US$1.21b due within 12 months. So it actually has US$346.8m more liquid assets than total liabilities.

This state of affairs indicates that Fastenal's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$36.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Fastenal boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Fastenal grew its EBIT by 2.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fastenal can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fastenal 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. Over the most recent three years, Fastenal recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fastenal has US$37.1m in net cash and a decent-looking balance sheet. So we don't think Fastenal's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fastenal's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.