Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that VOXX International Corporation (NASDAQ:VOXX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does VOXX International Carry?
The image below, which you can click on for greater detail, shows that at November 2019 VOXX International had debt of US$7.53m, up from US$16.2 in one year. However, its balance sheet shows it holds US$32.2m in cash, so it actually has US$24.6m net cash.
How Strong Is VOXX International's Balance Sheet?
We can see from the most recent balance sheet that VOXX International had liabilities of US$91.5m falling due within a year, and liabilities of US$22.1m due beyond that. Offsetting this, it had US$32.2m in cash and US$94.2m in receivables that were due within 12 months. So it actually has US$12.7m more liquid assets than total liabilities.
This surplus suggests that VOXX International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, VOXX International boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since VOXX International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year VOXX International had negative earnings before interest and tax, and actually shrunk its revenue by 13%, to US$401m. That's not what we would hope to see.
So How Risky Is VOXX International?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that VOXX International had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$14m of cash and made a loss of US$41m. But at least it has US$24.6m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for VOXX International (2 shouldn't be ignored) you should be aware of.
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.
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