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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Cavco Industries, Inc. (NASDAQ:CVCO) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Cavco Industries
How Much Debt Does Cavco Industries Carry?
You can click the graphic below for the historical numbers, but it shows that Cavco Industries had US$11.9m of debt in April 2021, down from US$14.6m, one year before. However, its balance sheet shows it holds US$341.8m in cash, so it actually has US$329.9m net cash.
How Strong Is Cavco Industries' Balance Sheet?
The latest balance sheet data shows that Cavco Industries had liabilities of US$237.1m due within a year, and liabilities of US$31.1m falling due after that. Offsetting these obligations, it had cash of US$341.8m as well as receivables valued at US$47.4m due within 12 months. So it actually has US$121.0m more liquid assets than total liabilities.
This surplus suggests that Cavco Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cavco Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Cavco Industries grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. 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 Cavco Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cavco Industries 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, Cavco Industries recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.