Cavco Industries (NASDAQ:CVCO) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cavco Industries, Inc. (NASDAQ:CVCO) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cavco Industries

How Much Debt Does Cavco Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Cavco Industries had US$1.92m of debt in April 2023, down from US$4.87m, one year before. However, it does have US$286.4m in cash offsetting this, leading to net cash of US$284.5m.

A Look At Cavco Industries' Liabilities

We can see from the most recent balance sheet that Cavco Industries had liabilities of US$293.4m falling due within a year, and liabilities of US$37.1m due beyond that. On the other hand, it had cash of US$286.4m and US$89.3m worth of receivables due within a year. So it actually has US$45.3m more liquid assets than total liabilities.

This state of affairs indicates that Cavco Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.44b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Cavco Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Cavco Industries grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. 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, while the tax-man may adore accounting profits, lenders only accept 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 most recent three years, Cavco Industries recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cavco Industries has US$284.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Cavco Industries has 1 warning sign we think you should be aware of.

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.