David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Malibu Boats, Inc. (NASDAQ: MBUU) uses debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
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How much debt do Malibu boats carry?
As you can see below, Malibu Boats had a debt of US $ 163.4 million in March 2021, up from US $ 192.7 million the year before. However, given that it has a cash reserve of $ 43.0 million, its net debt is less, at approximately $ 120.4 million.
How healthy is Malibu Boats’ track record?
According to the latest published balance sheet, Malibu Boats had a liability of US $ 128.6 million due within 12 months and a liability of US $ 256.0 million due beyond 12 months. On the other hand, he had $ 43.0 million in cash and $ 36.9 million in receivables within one year. It therefore has a liability totaling US $ 304.8 million more than its cash and short-term receivables combined.
Of course, Malibu Boats has a market cap of US $ 1.65 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Malibu Boats has a low net debt to EBITDA ratio of just 0.85. And its EBIT covers its interest costs a whopping 46.3 times. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. And we also warmly note that Malibu Boats increased its EBIT by 13% last year, making its debt more manageable. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Malibu Boats can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Malibu Boats has generated strong free cash flow equivalent to 63% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
The good news is that Malibu Boats’ demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And the good news does not end there, since its net debt to EBITDA also confirms this impression! Considering all of this data, it seems to us that Malibu Boats is taking a pretty sane approach to debt. While this carries some risk, it can also improve returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Malibu Boats which you should know before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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