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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. Above all, Crocs, Inc. (NASDAQ: CROX) is in debt. But should shareholders be concerned about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Crocs
What is Crocs’ net debt?
As you can see below, at the end of June 2021, Crocs had $ 386.4 million in debt, down from $ 275.0 million a year ago. Click on the image for more details. However, it has $ 197.9 million in cash offsetting that, which leads to net debt of around $ 188.5 million.
How healthy is Crocs’ track record?
We can see from the most recent balance sheet that Crocs had liabilities of US $ 380.9 million maturing within one year and liabilities of US $ 754.1 million maturing beyond that. In compensation for these obligations, he had cash of US $ 197.9 million as well as receivables valued at US $ 249.1 million due within 12 months. Its liabilities therefore total US $ 688.1 million more than the combination of its cash and short-term receivables.
Given that publicly traded Crocs shares are worth a total of $ 8.54 billion, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we look at debt over earnings with and without amortization charges.
Crocs’ net debt is only 0.35 times its EBITDA. And its EBIT covers its interest costs 56.8 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even more impressively, Crocs increased its EBIT by 300% year over year. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Crocs’ 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 earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly verify whether this EBIT generates a corresponding free cash flow. Over the past three years, Crocs has generated strong free cash flow equivalent to 77% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Crocs’ impressive interest coverage means it has the upper hand on its debt. And that’s just the start of good news as its EBIT growth rate is also very encouraging. It seems that Crocs has no trouble standing on his own, and he has no reason to fear his lenders. For investment nerds like us, his record is almost charming. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 3 warning signs for Crocs you need to be aware of it, and one of them is a little rude.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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 shares 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.
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