MasterCraft Boat Holdings (NASDAQ:MCFT) Seems To Use Debt Quite Sensibly

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. We note that MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MasterCraft Boat Holdings

What Is MasterCraft Boat Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that MasterCraft Boat Holdings had debt of US$65.0m at the end of April 2022, a reduction from US$91.9m over a year. On the flip side, it has US$13.8m in cash leading to net debt of about US$51.2m.

A Look At MasterCraft Boat Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that MasterCraft Boat Holdings had liabilities of US$89.0m due within 12 months and liabilities of US$67.5m due beyond that. On the other hand, it had cash of US$13.8m and US$21.3m worth of receivables due within a year. So it has liabilities totalling US$121.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because MasterCraft Boat Holdings is worth US$394.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

MasterCraft Boat Holdings has a low net debt to EBITDA ratio of only 0.50. And its EBIT easily covers its interest expense, being 48.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, MasterCraft Boat Holdings grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, MasterCraft Boat Holdings's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, MasterCraft Boat Holdings's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Taking all this data into account, it seems to us that MasterCraft Boat Holdings takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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 1 warning sign for MasterCraft Boat Holdings that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.