We Think Cavco Industries (NASDAQ:CVCO) Can Stay On Top Of Its Debt

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.' 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. Importantly, Cavco Industries, Inc. (NASDAQ:CVCO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cavco Industries

How Much Debt Does Cavco Industries Carry?

As you can see below, at the end of June 2024, Cavco Industries had US$1.85m of debt, up from US$1.69m a year ago. Click the image for more detail. But on the other hand it also has US$380.0m in cash, leading to a US$378.1m net cash position.

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$296.0m due within 12 months and liabilities of US$46.1m due beyond that. On the other hand, it had cash of US$380.0m and US$85.1m worth of receivables due within a year. So it actually has US$122.9m more liquid assets than total liabilities.

This surplus suggests that Cavco Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 42% 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 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Cavco Industries generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd 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$378.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in US$172m. 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.

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.