Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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. We note that Camping World Holdings, Inc. (NYSE: CWH) has debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Camping World Holdings
What is the debt of Camping World Holdings?
The graph below, which you can click for more details, shows Camping World Holdings owed US $ 1.63 billion in debt as of September 2021; about the same as the year before. However, he also had $ 132.8 million in cash, so his net debt is $ 1.50 billion.
How healthy is Camping World Holdings’ balance sheet?
According to the latest published balance sheet, Camping World Holdings had a liability of US $ 1.24 billion due within 12 months and a liability of US $ 2.26 billion due beyond 12 months. On the other hand, it had US $ 132.8 million in cash and US $ 218.7 million in receivables due within one year. Its liabilities therefore total $ 3.15 billion more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of $ 3.66 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Camping World Holdings’ net debt to EBITDA ratio of around 1.7 suggests only a moderate use of debt. And its strong 13.7 times coverage interest makes us even more comfortable. Even more impressively, Camping World Holdings increased its EBIT by 104% year over year. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Camping World Holdings’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Camping World Holdings has generated free cash flow of a very solid 89% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
Interest coverage from Camping World Holdings suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But frankly, we think his total passive level undermines that feeling a bit. Considering all of this data, it seems to us that Camping World Holdings is taking a fairly reasonable 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 – Camping World Holdings has 2 warning signs we think you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.