Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Thor Industries, Inc. (NYSE: THO) carries debt. 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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of 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.
See our latest analysis for Thor Industries
What is the debt of Thor Industries?
As you can see below, at the end of October 2021, Thor Industries was in debt of $ 2.24 billion, up from $ 1.60 billion a year ago. Click on the image for more details. However, it has US $ 336.2 million in cash offsetting this, leading to net debt of around US $ 1.91 billion.
How healthy is Thor Industries’ balance sheet?
The latest balance sheet data shows Thor Industries had liabilities of US $ 2.04 billion due within one year, and liabilities of US $ 2.60 billion due thereafter. In return, he had $ 336.2 million in cash and $ 1.17 billion in receivables due within 12 months. Its liabilities therefore total US $ 3.13 billion more than the combination of its cash and short-term receivables.
Thor Industries has a market capitalization of US $ 5.92 billion, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
Thor Industries has a low net debt to EBITDA ratio of just 1.5. And its EBIT covers its interest costs a whopping 11.8 times. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even more impressive was the fact that Thor Industries increased its EBIT by 131% year over year. This boost will make it even easier to pay off debt in the future. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Thor Industries can strengthen its balance sheet over time. 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 repay its debts with hard cash, not with accounting profits. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Thor Industries has generated strong free cash flow equivalent to 64% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Thor Industries’ impressive EBIT growth rate means that it is outweighing its debt. But, on a darker note, we’re a little concerned with its total liability level. Considering all of this data, it seems to us that Thor Industries is taking a pretty sane approach to debt. While this carries some risk, it can also improve returns for shareholders. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Thor Industries shows 3 warning signs in our investment analysis , and 1 of them is a bit rude …
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.
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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 documents. Simply Wall St has no position in any of the stocks mentioned.