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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Cavco Industries, Inc. (NASDAQ:CVCO) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Cavco Industries Carry?
As you can see below, Cavco Industries had US$13.2m of debt, at October 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$243.2m in cash to offset that, meaning it has US$229.9m net cash.
A Look At Cavco Industries' Liabilities
Zooming in on the latest balance sheet data, we can see that Cavco Industries had liabilities of US$282.3m due within 12 months and liabilities of US$39.9m due beyond that. Offsetting these obligations, it had cash of US$243.2m as well as receivables valued at US$72.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.99m.
Having regard to Cavco Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.46b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cavco Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Cavco Industries grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. 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 Cavco Industries'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cavco Industries 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. During the last three years, Cavco Industries generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
We could understand if investors are concerned about Cavco Industries's liabilities, but we can be reassured by the fact it has has net cash of US$229.9m. And it impressed us with free cash flow of US$93m, being 90% of its EBIT. So is Cavco Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cavco Industries is showing 1 warning sign in our investment analysis , you should know about...
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.
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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.