These 4 Measures Indicate That MasterCraft Boat Holdings (NASDAQ:MCFT) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 MasterCraft Boat Holdings

How Much Debt Does MasterCraft Boat Holdings Carry?

The image below, which you can click on for greater detail, shows that MasterCraft Boat Holdings had debt of US$50.4m at the end of March 2024, a reduction from US$54.4m over a year. But on the other hand it also has US$105.7m in cash, leading to a US$55.3m net cash position.

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$86.8m falling due within a year, and liabilities of US$57.0m due beyond that. Offsetting these obligations, it had cash of US$105.7m as well as receivables valued at US$13.5m due within 12 months. So its liabilities total US$24.6m more than the combination of its cash and short-term receivables.

Since publicly traded MasterCraft Boat Holdings shares are worth a total of US$334.0m, 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. While it does have liabilities worth noting, MasterCraft Boat Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for MasterCraft Boat Holdings if management cannot prevent a repeat of the 62% 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 ultimately the future profitability of the business will decide if MasterCraft Boat Holdings can strengthen its balance sheet over time. 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. While MasterCraft Boat Holdings 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. Over the most recent three years, MasterCraft Boat Holdings recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MasterCraft Boat Holdings has US$55.3m in net cash. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in US$27m. So we are not troubled with MasterCraft Boat Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for MasterCraft Boat Holdings (1 is significant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com