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Is Skyline Champion (NYSE:SKY) Using Debt Sensibly?

Simply Wall St

Warren Buffett famously said, '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. Importantly, Skyline Champion Corporation (NYSE:SKY) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Skyline Champion

What Is Skyline Champion's Debt?

As you can see below, Skyline Champion had US$82.0m of debt at June 2019, down from US$88.8m a year prior. But it also has US$143.6m in cash to offset that, meaning it has US$61.6m net cash.

NYSE:SKY Historical Debt, October 1st 2019

A Look At Skyline Champion's Liabilities

According to the last reported balance sheet, Skyline Champion had liabilities of US$204.5m due within 12 months, and liabilities of US$85.8m due beyond 12 months. Offsetting this, it had US$143.6m in cash and US$57.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$89.0m.

Since publicly traded Skyline Champion shares are worth a total of US$1.71b, 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, Skyline Champion also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Skyline Champion 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.

In the last year Skyline Champion wasn't profitable at an EBIT level, but managed to grow its revenue by23%, to US$1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Skyline Champion?

Although Skyline Champion had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$73m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Skyline Champion shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. For riskier companies like Skyline Champion I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.