David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Movado Group, Inc. (NYSE:MOV) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Movado Group's Net Debt?
As you can see below, at the end of April 2019, Movado Group had US$49.1m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$151.0m in cash, leading to a US$102.0m net cash position.
How Strong Is Movado Group's Balance Sheet?
The latest balance sheet data shows that Movado Group had liabilities of US$112.0m due within a year, and liabilities of US$223.4m falling due after that. Offsetting this, it had US$151.0m in cash and US$85.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$98.6m.
Of course, Movado Group has a market capitalization of US$568.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Movado Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Movado Group grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 Movado Group'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. While Movado Group 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. Over the last three years, Movado Group recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Although Movado Group'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$102m. And it impressed us with free cash flow of US$52m, being 90% of its EBIT. So is Movado Group's debt a risk? It doesn't seem so to us. We'd be very excited to see if Movado Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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