David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Malibu Boats, Inc. (NASDAQ: MBUU) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debts 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) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
How much debt do Malibu boats carry?
The image below, which you can click for more details, shows that in June 2021, Malibu Boats had a debt of $ 143.3 million, compared to $ 82.8 million in a year. However, because it has a cash reserve of US $ 41.5 million, its net debt is less, at around US $ 101.8 million.
NasdaqGM: MBUU History of debt to equity November 1, 2021
How healthy is Malibu Boats’ track record?
The latest balance sheet data shows that Malibu Boats had a liability of $ 134.4 million due within one year and a liability of $ 227.2 million due thereafter. On the other hand, it had US $ 41.5 million in cash and US $ 49.8 million in receivables due within one year. It therefore has a liability totaling US $ 270.3 million more than its combined cash and short-term receivables.
Considering that Malibu Boats has a market cap of US $ 1.51 billion, it’s hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Malibu Boats net debt is only 0.55 times its EBITDA. And its EBIT covers its interest costs 63.5 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are happy to report that Malibu Boats has increased its EBIT by 81%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Malibu Boats can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Malibu Boats has recorded free cash flow of 61% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Malibu Boats’ impressive interest coverage means it has the upper hand on its debt. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Looking at the big picture, we think Malibu Boats’ use of debt looks very reasonable and we don’t care. After all, reasonable leverage can increase returns on equity. Another factor that would give us confidence in Malibu Boats would be if insiders bought shares: if you are also aware of this signal, you can find out instantly by clicking on this link.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, don’t hesitate to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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