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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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Thor Industries, Inc. (NYSE:THO) does use debt in its business. But is this debt a concern to shareholders?
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. 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. 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.
View our latest analysis for Thor Industries
What Is Thor Industries's Net Debt?
As you can see below, at the end of April 2019, Thor Industries had US$2.42b of debt, up from US$80.0m a year ago. Click the image for more detail. However, because it has a cash reserve of US$461.1m, its net debt is less, at about US$1.96b.
A Look At Thor Industries's Liabilities
Zooming in on the latest balance sheet data, we can see that Thor Industries had liabilities of US$1.51b due within 12 months and liabilities of US$2.42b due beyond that. On the other hand, it had cash of US$461.1m and US$841.1m worth of receivables due within a year. So its liabilities total US$2.63b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$2.99b, so it does suggest shareholders should keep an eye on Thor Industries's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).