YETI Holdings (NYSE:YETI) Has A Pretty Healthy Balance Sheet

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 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 YETI Holdings, Inc. (NYSE:YETI) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for YETI Holdings

What Is YETI Holdings's Debt?

The image below, which you can click on for greater detail, shows that YETI Holdings had debt of US$89.0m at the end of December 2022, a reduction from US$110.9m over a year. But it also has US$234.7m in cash to offset that, meaning it has US$145.7m net cash.

A Look At YETI Holdings' Liabilities

We can see from the most recent balance sheet that YETI Holdings had liabilities of US$409.0m falling due within a year, and liabilities of US$141.2m due beyond that. On the other hand, it had cash of US$234.7m and US$79.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$236.1m.

Given YETI Holdings has a market capitalization of US$3.28b, it's hard to believe these liabilities pose much 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, YETI Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that YETI Holdings's load is not too heavy, because its EBIT was down 54% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 YETI 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While YETI 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, YETI Holdings recorded free cash flow worth 76% 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

We could understand if investors are concerned about YETI Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$145.7m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in US$44m. So we don't have any problem with YETI Holdings's use of debt. 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. Case in point: We've spotted 1 warning sign for YETI Holdings you should be aware of.

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.