We believe Cavco Industries (NASDAQ: CVCO) can manage its debt with ease
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Cavco Industries, Inc. (NASDAQ: CVCO) uses debt in its business. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Cavco Industries
What is Cavco Industries’ net debt?
You can click on the graph below for historical numbers, but it shows Cavco Industries had $ 11.9 million in debt in April 2021, up from $ 14.6 million a year earlier. But it also has $ 341.8 million in cash to make up for that, which means it has $ 329.9 million in net cash.
How strong is Cavco Industries’ balance sheet?
The latest balance sheet data shows that Cavco Industries had liabilities of US $ 237.1 million due within one year and liabilities of US $ 31.1 million due thereafter. On the other hand, it had US $ 341.8 million in cash and US $ 47.4 million in receivables due within one year. So he actually has $ 121.0 million After liquid assets as total liabilities.
This surplus suggests that Cavco Industries has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that Cavco Industries has more cash than debt is arguably a good indication that it can safely manage its debt.
Fortunately, Cavco Industries has increased its EBIT by 6.0% over the past year, which makes this debt even more manageable. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Cavco Industries’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. Cavco Industries may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Cavco Industries has recorded free cash flow totaling 81% of its EBIT, which is higher than what we normally expected. This puts him in a very strong position to pay off the debt.
While it’s always a good idea to investigate a company’s debt, in this case Cavco Industries has US $ 329.9 million in net cash and a decent balance sheet. The icing on the cake is that he converted 81% of that EBIT into free cash flow, bringing in US $ 88 million. So is Cavco Industries’ debt a risk? It does not seem to us. On top of most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have understood this as well, you are in luck because today you can view this interactive graph of historical earnings per share of Cavco Industries for free.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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