- Oops!Something went wrong.Please try again later.
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. Importantly, VOXX International Corporation (NASDAQ:VOXX) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is VOXX International's Debt?
As you can see below, VOXX International had US$6.19m of debt at May 2021, down from US$27.9m a year prior. However, it does have US$36.7m in cash offsetting this, leading to net cash of US$30.5m.
How Strong Is VOXX International's Balance Sheet?
We can see from the most recent balance sheet that VOXX International had liabilities of US$121.6m falling due within a year, and liabilities of US$26.5m due beyond that. Offsetting these obligations, it had cash of US$36.7m as well as receivables valued at US$99.3m due within 12 months. So its liabilities total US$12.1m more than the combination of its cash and short-term receivables.
Since publicly traded VOXX International shares are worth a total of US$254.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, VOXX International also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although VOXX International made a loss at the EBIT level, last year, it was also good to see that it generated US$31m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine VOXX International'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. VOXX International 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 last year, VOXX International reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
We could understand if investors are concerned about VOXX International's liabilities, but we can be reassured by the fact it has has net cash of US$30.5m. So we don't have any problem with VOXX International's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - VOXX International has 1 warning sign we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.