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MarineMax (NYSE:HZO) Has A Rock Solid Balance Sheet

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. Importantly, MarineMax, Inc. (NYSE:HZO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MarineMax

What Is MarineMax's Debt?

As you can see below, at the end of June 2022, MarineMax had US$156.1m of debt, up from US$54.5m a year ago. Click the image for more detail. But it also has US$281.4m in cash to offset that, meaning it has US$125.3m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is MarineMax's Balance Sheet?

The latest balance sheet data shows that MarineMax had liabilities of US$412.6m due within a year, and liabilities of US$164.8m falling due after that. On the other hand, it had cash of US$281.4m and US$68.8m worth of receivables due within a year. So its liabilities total US$227.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because MarineMax is worth US$856.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, MarineMax also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, MarineMax grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MarineMax 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MarineMax 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. Happily for any shareholders, MarineMax actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although MarineMax's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$125.3m. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in US$117m. So we don't think MarineMax's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for MarineMax you should know about.

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.

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