Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries ”. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Skyline Champion Corporation (NYSE: SKY) uses debt in its business. But should shareholders be worried about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance growth without any negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
How much debt is Skyline Champion?
The image below, which you can click for more details, shows Skyline Champion owed $ 65.1 million in debt at the end of April 2021, a reduction of $ 111.2 million. dollars over a year. However, his balance sheet shows that he holds US $ 262.6 million in cash, so he actually has US $ 197.5 million in net cash.
NYSE: SKY Debt to Capital History May 31, 2021
A look at the responsibilities of the Skyline champion
According to the latest published balance sheet, Skyline Champion had a liability of US $ 263.6 million due within 12 months and a liability of US $ 85.6 million beyond 12 months. In contrast, it had US $ 262.6 million in cash and US $ 57.5 million in receivables due within one year. As a result, its liabilities total $ 29.2 million more than the combination of its cash and short-term receivables.
This state of affairs indicates that Skyline Champion’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the $ 2.87 billion company is highly unlikely to be cash-strapped, but it’s still worth keeping an eye on the balance sheet. While he has some liabilities to note, Skyline Champion also has more cash than debt, so we’re pretty confident he can handle his debt safely.
And we also warmly note that Skyline Champion increased their EBIT by 19% last year, which makes their debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Skyline Champion can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with cash, not book profits. While Skyline Champion has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erode) that money. balanced. Fortunately for all shareholders, Skyline Champion has actually produced more free cash flow than EBIT over the past two years. This kind of big cash conversion turns us on as much as the crowd when the beat drops at a Daft Punk concert.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Skyline Champion has $ 197.5 million in net cash. And he impressed us with free cash flow of US $ 146 million, or 104% of his EBIT. So is Skyline Champion’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every company has them, and we’ve spotted 1 warning sign for Skyline Champion you should know.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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