Cavco Industries (NASDAQ:CVCO) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Cavco Industries, Inc. (NASDAQ:CVCO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cavco Industries

What Is Cavco Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cavco Industries had US$12.7m of debt in December 2020, down from US$15.0m, one year before. However, its balance sheet shows it holds US$344.5m in cash, so it actually has US$331.8m net cash.

How Strong Is Cavco Industries' Balance Sheet?

According to the last reported balance sheet, Cavco Industries had liabilities of US$213.3m due within 12 months, and liabilities of US$31.5m due beyond 12 months. Offsetting these obligations, it had cash of US$344.5m as well as receivables valued at US$40.9m due within 12 months. So it actually has US$140.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Cavco Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cavco Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Cavco Industries's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cavco Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Cavco Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Cavco Industries generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cavco Industries has net cash of US$331.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$111m, being 95% of its EBIT. So we don't have any problem with Cavco Industries's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Cavco Industries, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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