Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Fastenal Company (NASDAQ:FAST) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fastenal's Debt?

The image below, which you can click on for greater detail, shows that Fastenal had debt of US$235.0m at the end of June 2024, a reduction from US$350.0m over a year. However, its balance sheet shows it holds US$255.5m in cash, so it actually has US$20.5m net cash.

A Look At Fastenal's Liabilities

Zooming in on the latest balance sheet data, we can see that Fastenal had liabilities of US$717.0m due within 12 months and liabilities of US$390.9m due beyond that. Offsetting these obligations, it had cash of US$255.5m as well as receivables valued at US$1.20b due within 12 months. So it can boast US$352.4m more liquid assets than total liabilities.

Having regard to Fastenal's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$41.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Fastenal has more cash than debt is arguably a good indication that it can manage its debt safely.

While Fastenal doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fastenal 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Fastenal produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fastenal has US$20.5m in net cash and a decent-looking balance sheet. So is Fastenal's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Fastenal, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.