Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that The Shyft Group, Inc. (NASDAQ:SHYF) has debt on its balance sheet. But the more important question is: what risk does this debt create?
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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Shyft Group
What is Shyft Group’s net debt?
As you can see below, Shyft Group had US$10.5 million in debt as of December 2021, up from US$48.1 million the previous year. But on the other hand, he also has $37.2 million in cash, resulting in a net cash position of $26.7 million.
How strong is the Shyft Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Shyft Group had liabilities of US$135.8 million due within 12 months and liabilities of US$45.2 million due beyond. In return, he had $37.2 million in cash and $118.7 million in receivables due within 12 months. Thus, its liabilities total $25.2 million more than the combination of its cash and short-term receivables.
Of course, Shyft Group has a market capitalization of US$988.0 million, so those liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities to note, Shyft Group also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On top of that, we are pleased to report that Shyft Group increased its EBIT by 69%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Shyft Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although the Shyft Group has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, Shyft Group has produced strong free cash flow equivalent to 67% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Shyft Group has $26.7 million in net cash. And we liked the look of EBIT growth of 69% YoY last year. So is Shyft Group’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Shyft Group you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.