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. As with many other companies VOXX International Corporation (NASDAQ:VOXX) makes use of debt. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does VOXX International Carry?
As you can see below, VOXX International had US$6.19m of debt at May 2021, down from US$27.9m a year prior. However, its balance sheet shows it holds US$36.7m in cash, so it actually has US$30.5m net cash.
How Healthy Is VOXX International's Balance Sheet?
The latest balance sheet data shows that VOXX International had liabilities of US$121.6m due within a year, and liabilities of US$26.5m falling due after that. On the other hand, it had cash of US$36.7m and US$96.3m worth of receivables due within a year. So its liabilities total US$15.1m more than the combination of its cash and short-term receivables.
Given VOXX International has a market capitalization of US$274.9m, 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. While it does have liabilities worth noting, VOXX International also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although VOXX International made a loss at the EBIT level, last year, it was also good to see that it generated US$31m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if VOXX International 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While VOXX International 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 last year, VOXX International reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
We could understand if investors are concerned about VOXX International's liabilities, but we can be reassured by the fact it has has net cash of US$30.5m. So we are not troubled with VOXX International's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for VOXX International you should know about.
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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