We Think Malibu Boats (NASDAQ:MBUU) Can Stay On Top Of Its 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. Importantly, Malibu Boats, Inc. (NASDAQ:MBUU) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Malibu Boats

How Much Debt Does Malibu Boats Carry?

You can click the graphic below for the historical numbers, but it shows that Malibu Boats had US$35.0m of debt in December 2023, down from US$70.2m, one year before. However, its balance sheet shows it holds US$55.7m in cash, so it actually has US$20.7m net cash.

How Strong Is Malibu Boats' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Malibu Boats had liabilities of US$138.9m due within 12 months and liabilities of US$112.5m due beyond that. Offsetting this, it had US$55.7m in cash and US$27.5m in receivables that were due within 12 months. So it has liabilities totalling US$168.1m more than its cash and near-term receivables, combined.

Malibu Boats has a market capitalization of US$786.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Malibu Boats also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Malibu Boats has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Malibu Boats does have more liabilities than liquid assets, it also has net cash of US$20.7m. So we don't have any problem with Malibu Boats's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Malibu Boats that you should be aware of before investing here.

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.