Cavco Industries (NASDAQ:CVCO) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Cavco Industries, Inc. (NASDAQ:CVCO) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cavco Industries

What Is Cavco Industries's Net Debt?

As you can see below, Cavco Industries had US$13.2m of debt, at October 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$243.2m in cash, leading to a US$229.9m net cash position.

A Look At Cavco Industries' Liabilities

According to the last reported balance sheet, Cavco Industries had liabilities of US$282.3m due within 12 months, and liabilities of US$39.9m due beyond 12 months. On the other hand, it had cash of US$243.2m and US$72.0m worth of receivables due within a year. So its liabilities total US$6.99m more than the combination of its cash and short-term receivables.

Having regard to Cavco Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.75b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Cavco Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Cavco Industries grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cavco Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Cavco Industries recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cavco Industries has US$229.9m in net cash. And it impressed us with free cash flow of US$93m, being 90% of its EBIT. So we don't think Cavco Industries's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cavco Industries you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.