Is MasterCraft Boat Holdings (NASDAQ:MCFT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MasterCraft Boat Holdings

How Much Debt Does MasterCraft Boat Holdings Carry?

As you can see below, MasterCraft Boat Holdings had US$54.4m of debt at April 2023, down from US$65.0m a year prior. However, it does have US$101.4m in cash offsetting this, leading to net cash of US$47.0m.

How Healthy Is MasterCraft Boat Holdings' Balance Sheet?

We can see from the most recent balance sheet that MasterCraft Boat Holdings had liabilities of US$103.0m falling due within a year, and liabilities of US$59.1m due beyond that. Offsetting this, it had US$101.4m in cash and US$18.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$42.1m.

Since publicly traded MasterCraft Boat Holdings shares are worth a total of US$507.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MasterCraft Boat Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that MasterCraft Boat Holdings has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MasterCraft Boat Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MasterCraft Boat Holdings 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, MasterCraft Boat Holdings produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about MasterCraft Boat Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$47.0m. And it impressed us with its EBIT growth of 23% over the last year. So we don't think MasterCraft Boat Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with MasterCraft Boat Holdings .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.