Legendary fund manager Li Lu (who was backed by Charlie Munger) once said, “The biggest investment risk is not the volatility of prices but whether you suffer a permanent loss of capital.” So it might be obvious that you need to consider debt, when you think about how risky a particular stock is, because too much debt can send a company into the abyss. We can see that Camping World Holdings, Inc. (NYSE:CWH) uses debt in its business. But the more important question is: How much risk does this debt carry?
What is the risk of debt?
Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive rate. In the worst case, a company can go bankrupt if it cannot pay its creditors. A more common (but still costly) case, however, is when a company has to issue stock at bargain prices, which permanently dilutes shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive ones. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
How Much Debt Does Camping World Holdings Have?
As you can see below, Camping World Holdings had $1.63 billion in debt as of September 2021, which is about the same as last year. You can click on the chart to see more details. However, it also had $132.8 million in cash on hand, making its net debt $1.50 billion.
A look at Camping World Holdings’ liabilities
According to its most recently reported balance sheet, Camping World Holdings had $1.24 billion in debt maturing within 12 months and $2.26 billion in debt maturing after 12 months . Against these obligations, the Company had cash of $132.8 million and accounts receivable of $218.7 million that were due within 12 months. So its liabilities are $3.15 billion more than the combination of cash and short-term receivables.
Given that this deficit is actually higher than the company’s market cap of $2.86 billion, we think shareholders really should watch Camping World Holdings’ debt like parents who give birth to their child watch cycling. In the scenario where the company needed to quickly clean up its balance sheet, shareholders would likely suffer significant dilution.
We use two main metrics to tell us about debt versus earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), the second is how often earnings before interest and taxes (EBIT) cover its interest expense (or interest coverage for short). . The advantage of this approach is that we consider both the absolute level of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).
We’d say that Camping World Holdings’ modest net debt to EBITDA ratio (1.7) indicates caution on debt. And its impressive EBIT of 13.7 times its interest expense implies that the debt burden is as light as a peacock feather. Better yet, Camping World Holdings grew its EBIT by 104% over the past year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. Undoubtedly, we learn most about debt from the balance sheet. But ultimately, the company’s future profitability will determine whether Camping World Holdings can strengthen its balance sheet over time. So if you focus on the future, you can check this free Analyst earnings forecast report.
Finally, while the helmsman may love book profits, lenders only accept cold, hard cash. So we always check how much of that EBIT translates into free cash flow. Over the past three years, Camping World Holdings has generated free cash flow at a very robust 89% of its EBIT, more than we expected. That positions it well to pay down debt when that is desirable.
The good news is that Camping World Holdings’ proven ability to cover its interest expense with its EBIT pleases us like a fluffy puppy pleases a toddler. But the bare truth is that the level of total liabilities worries us. Taking all of these things into account, it appears that Camping World Holdings can easily manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it pays to monitor the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, any business can have off-balance-sheet risks. Case in point: We discovered it 3 warning signs for Camping World Holdings you should be aware of this.
If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, check out our list of net cash growth stocks right away.
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