Is Malibu Boats (NASDAQ:MBUU) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Malibu Boats, Inc. (NASDAQ:MBUU) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Malibu Boats

How Much Debt Does Malibu Boats Carry?

As you can see below, Malibu Boats had US$20.3m of debt at March 2023, down from US$119.8m a year prior. However, its balance sheet shows it holds US$35.2m in cash, so it actually has US$14.9m net cash.

How Healthy Is Malibu Boats' Balance Sheet?

According to the last reported balance sheet, Malibu Boats had liabilities of US$147.5m due within 12 months, and liabilities of US$101.4m due beyond 12 months. On the other hand, it had cash of US$35.2m and US$80.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$132.8m.

Given Malibu Boats has a market capitalization of US$1.23b, 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!

And we also note warmly that Malibu Boats grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Malibu Boats can strengthen its balance sheet over time. 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. Malibu Boats 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. During the last three years, Malibu Boats produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$14.9m. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think Malibu Boats's use of debt is risky. 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 Malibu Boats's earnings per share history for free.

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.