Is Champion Homes (NYSE:SKY) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Champion Homes, Inc. (NYSE:SKY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Champion Homes

How Much Debt Does Champion Homes Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Champion Homes had US$112.9m of debt, an increase on US$105.1m, over one year. But it also has US$581.8m in cash to offset that, meaning it has US$468.9m net cash.

A Look At Champion Homes' Liabilities

The latest balance sheet data shows that Champion Homes had liabilities of US$394.2m due within a year, and liabilities of US$115.0m falling due after that. Offsetting this, it had US$581.8m in cash and US$68.4m in receivables that were due within 12 months. So it can boast US$141.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Champion Homes could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Champion Homes boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Champion Homes's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Champion Homes'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Champion Homes 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. During the last three years, Champion Homes produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Champion Homes has US$468.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$149m, being 74% of its EBIT. So we are not troubled with Champion Homes's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Champion Homes .

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.