Is VOXX International (NASDAQ:VOXX) Using Too Much Debt?
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 can see that VOXX International Corporation (NASDAQ:VOXX) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for VOXX International
What Is VOXX International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of November 2021 VOXX International had US$12.3m of debt, an increase on US$7.03m, over one year. However, its balance sheet shows it holds US$21.2m in cash, so it actually has US$8.84m net cash.
How Healthy Is VOXX International's Balance Sheet?
We can see from the most recent balance sheet that VOXX International had liabilities of US$220.9m falling due within a year, and liabilities of US$36.5m due beyond that. Offsetting these obligations, it had cash of US$21.2m as well as receivables valued at US$133.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$102.4m.
This deficit isn't so bad because VOXX International is worth US$278.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, VOXX International boasts net cash, so it's fair to say it does not have a heavy debt load!
Sadly, VOXX International's EBIT actually dropped 4.5% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. When analysing debt levels, the balance sheet is the obvious place to start. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 two years, VOXX International actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
Although VOXX International'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$8.84m. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in US$27m. So we are not troubled with VOXX International's debt use. We'd be motivated to research the stock further if we found out that VOXX International insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
