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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that YETI Holdings, Inc. (NYSE:YETI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is YETI Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that YETI Holdings had US$121.9m of debt in July 2021, down from US$288.7m, one year before. But it also has US$233.8m in cash to offset that, meaning it has US$111.9m net cash.
How Healthy Is YETI Holdings' Balance Sheet?
According to the last reported balance sheet, YETI Holdings had liabilities of US$304.0m due within 12 months, and liabilities of US$175.9m due beyond 12 months. On the other hand, it had cash of US$233.8m and US$81.9m worth of receivables due within a year. So its liabilities total US$164.2m more than the combination of its cash and short-term receivables.
Having regard to YETI Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$8.57b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, YETI Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, YETI Holdings grew its EBIT by 138% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 YETI Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. YETI Holdings 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 three years, YETI Holdings recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
We could understand if investors are concerned about YETI Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$111.9m. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$274m. So we don't think YETI Holdings'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. For instance, we've identified 1 warning sign for YETI Holdings that you should be aware of.
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.
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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