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. As with many other companies Movado Group, Inc. (NYSE:MOV) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Movado Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Movado Group had US$10.0m of debt in April 2021, down from US$82.5m, one year before. However, its balance sheet shows it holds US$187.4m in cash, so it actually has US$177.4m net cash.
How Strong Is Movado Group's Balance Sheet?
We can see from the most recent balance sheet that Movado Group had liabilities of US$114.6m falling due within a year, and liabilities of US$148.4m due beyond that. On the other hand, it had cash of US$187.4m and US$102.9m worth of receivables due within a year. So it can boast US$27.3m more liquid assets than total liabilities.
This surplus suggests that Movado Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Movado Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Movado Group grew its EBIT by 216% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Movado Group 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 Movado Group 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 three years, Movado Group recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to investigate a company's debt, in this case Movado Group has US$177.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$76m, being 98% of its EBIT. So is Movado Group's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Movado Group (of which 1 is a bit unpleasant!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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