These 4 Measures Indicate That Skyline Champion (NYSE:SKY) Is Using Debt Safely
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Skyline Champion Corporation (NYSE:SKY) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See our latest analysis for Skyline Champion
What Is Skyline Champion's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Skyline Champion had US$47.9m of debt in April 2022, down from US$65.1m, one year before. However, its balance sheet shows it holds US$435.4m in cash, so it actually has US$387.5m net cash.
How Strong Is Skyline Champion's Balance Sheet?
We can see from the most recent balance sheet that Skyline Champion had liabilities of US$350.1m falling due within a year, and liabilities of US$59.4m due beyond that. On the other hand, it had cash of US$435.4m and US$90.5m worth of receivables due within a year. So it can boast US$116.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Skyline Champion could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Skyline Champion boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Skyline Champion grew its EBIT by 207% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Skyline Champion's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Skyline Champion may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Skyline Champion recorded free cash flow worth 75% 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 Skyline Champion has US$387.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 207% over the last year. So is Skyline Champion's debt a risk? It doesn't seem so to us. 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 instance, we've identified 2 warning signs for Skyline Champion (1 is concerning) 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
