We Think Cavco Industries (NASDAQ:CVCO) Can Manage Its Debt With Ease

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. We note that Cavco Industries, Inc. (NASDAQ:CVCO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cavco Industries

What Is Cavco Industries's Debt?

The image below, which you can click on for greater detail, shows that Cavco Industries had debt of US$5.30m at the end of April 2022, a reduction from US$11.9m over a year. However, it does have US$264.2m in cash offsetting this, leading to net cash of US$258.9m.

How Strong Is Cavco Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cavco Industries had liabilities of US$294.2m due within 12 months and liabilities of US$29.5m due beyond that. Offsetting these obligations, it had cash of US$264.2m as well as receivables valued at US$96.1m due within 12 months. So it actually has US$36.6m more liquid assets than total liabilities.

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$1.87b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cavco Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Cavco Industries grew its EBIT by 129% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 last three years, Cavco Industries recorded free cash flow worth a fulsome 81% 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 we empathize with investors who find debt concerning, you should keep in mind that Cavco Industries has net cash of US$258.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$126m. So is Cavco Industries's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Cavco Industries's earnings per share history for free.

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.