Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Duluth Holdings Inc. (NASDAQ:DLTH) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
How much debt does Duluth Holdings have?
The image below, which you can click for more details, shows Duluth Holdings had $27.2 million in debt at the end of May 2022, a reduction from $45.3 million year-over-year. However, his balance sheet shows that he holds $40.4 million in cash, so he actually has $13.2 million in net cash.
How healthy is Duluth Holdings’ balance sheet?
The latest balance sheet data shows that Duluth Holdings had liabilities of $108.2 million due within the year, and liabilities of $173.3 million due thereafter. As compensation for these obligations, it had cash of US$40.4 million and receivables valued at US$6.95 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $234.1 million.
This is a mountain of leverage compared to its market capitalization of US$299.9 million. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. While it has liabilities worth noting, Duluth Holdings also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On the other hand, Duluth Holdings has seen its EBIT fall by 4.6% over the last twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But future earnings, more than anything, will determine Duluth Holdings’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Duluth Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past three years, Duluth Holdings has generated free cash flow of a very strong 81% of EBIT, more than expected. This puts him in a very strong position to repay his debt.
Although Duluth Holdings has more liabilities than liquid assets, it also has a net cash position of $13.2 million. And it impressed us with free cash flow of $36 million, or 81% of its EBIT. We are therefore not concerned about Duluth Holdings’ use of debt. Over time, stock prices tend to track earnings per share, so if you’re interested in Duluth Holdings, you might want to click here to view an interactive chart of its earnings per share history.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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