Here's Why Malibu Boats (NASDAQ:MBUU) Can Manage Its Debt Responsibly

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.' 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 Malibu Boats, Inc. (NASDAQ:MBUU) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Malibu Boats

How Much Debt Does Malibu Boats Carry?

As you can see below, Malibu Boats had US$15.0m of debt at March 2024, down from US$20.3m a year prior. However, it does have US$47.1m in cash offsetting this, leading to net cash of US$32.1m.

A Look At Malibu Boats' Liabilities

According to the last reported balance sheet, Malibu Boats had liabilities of US$153.0m due within 12 months, and liabilities of US$82.3m due beyond 12 months. Offsetting these obligations, it had cash of US$47.1m as well as receivables valued at US$45.5m due within 12 months. So it has liabilities totalling US$142.7m more than its cash and near-term receivables, combined.

Given Malibu Boats has a market capitalization of US$736.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Malibu Boats 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 Malibu Boats if management cannot prevent a repeat of the 40% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Malibu Boats'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, a company can only pay off debt with cold hard cash, not accounting profits. While Malibu Boats 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. In the last three years, Malibu Boats's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Malibu Boats's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$32.1m. So we are not troubled with Malibu Boats's debt use. We'd be motivated to research the stock further if we found out that Malibu Boats insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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