We Think Skyline Champion (NYSE:SKY) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Skyline Champion Corporation (NYSE:SKY) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Skyline Champion

How Much Debt Does Skyline Champion Carry?

As you can see below, Skyline Champion had US$12.4m of debt at April 2023, down from US$47.9m a year prior. But on the other hand it also has US$747.5m in cash, leading to a US$735.0m net cash position.

How Strong Is Skyline Champion's Balance Sheet?

According to the last reported balance sheet, Skyline Champion had liabilities of US$248.9m due within 12 months, and liabilities of US$80.8m due beyond 12 months. On the other hand, it had cash of US$747.5m and US$67.3m worth of receivables due within a year. So it can boast US$485.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Skyline Champion could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Skyline Champion has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Skyline Champion has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. 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 Skyline Champion 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Skyline Champion may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Skyline Champion recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Skyline Champion has US$735.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 56% over the last year. So we don't think Skyline Champion's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Skyline Champion , and understanding them should be part of your investment process.

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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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.