Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MarineMax, Inc. (NYSE:HZO) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is MarineMax's Debt?
You can click the graphic below for the historical numbers, but it shows that MarineMax had US$163.7m of debt in December 2021, down from US$216.2m, one year before. But it also has US$216.3m in cash to offset that, meaning it has US$52.6m net cash.
How Healthy Is MarineMax's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that MarineMax had liabilities of US$379.9m due within 12 months and liabilities of US$161.9m due beyond that. Offsetting these obligations, it had cash of US$216.3m as well as receivables valued at US$45.6m due within 12 months. So its liabilities total US$279.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because MarineMax is worth US$888.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, MarineMax boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that MarineMax has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MarineMax's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. MarineMax 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. Happily for any shareholders, MarineMax actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While MarineMax does have more liabilities than liquid assets, it also has net cash of US$52.6m. The cherry on top was that in converted 157% of that EBIT to free cash flow, bringing in US$352m. So is MarineMax'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for MarineMax that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.