These 4 Measures Indicate That Cavco Industries (NASDAQ:CVCO) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cavco Industries, Inc. (NASDAQ:CVCO) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cavco Industries

What Is Cavco Industries's Debt?

The chart below, which you can click on for greater detail, shows that Cavco Industries had US$1.73m in debt in September 2024; about the same as the year before. But on the other hand it also has US$388.7m in cash, leading to a US$387.0m net cash position.

How Strong Is Cavco Industries' Balance Sheet?

We can see from the most recent balance sheet that Cavco Industries had liabilities of US$311.5m falling due within a year, and liabilities of US$44.7m due beyond that. On the other hand, it had cash of US$388.7m and US$94.3m worth of receivables due within a year. So it actually has US$126.8m 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!

The modesty of its debt load may become crucial for Cavco Industries if management cannot prevent a repeat of the 29% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cavco Industries's ability to maintain a healthy balance sheet going forward. 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. 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. Over the last three years, Cavco Industries recorded free cash flow worth a fulsome 82% 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 investigate a company's debt, in this case Cavco Industries has US$387.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$148m. So we are not troubled with Cavco Industries's debt use. 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.