Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Camping World Holdings, Inc. (NYSE:CWH) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Camping World Holdings Carry?
As you can see below, at the end of March 2022, Camping World Holdings had US$2.65b of debt, up from US$1.69b a year ago. Click the image for more detail. However, it does have US$139.5m in cash offsetting this, leading to net debt of about US$2.51b.
How Healthy Is Camping World Holdings’ Balance Sheet?
According to the last reported balance sheet, Camping World Holdings had liabilities of US$1.96b due within 12 months, and liabilities of US$2.56b due beyond 12 months. Offsetting these obligations, it had cash of US$139.5m as well as receivables valued at US$252.1m due within 12 months. So its liabilities total US$4.13b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$1.91b company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. After all, Camping World Holdings would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Camping World Holdings has a debt to EBITDA ratio of 2.8, which signals significant debt, but is still pretty reasonable for most types of business. But its EBIT was about 12.4 times its interest expense, implying the company isn’t really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Also relevant is that Camping World Holdings has grown its EBIT by a very respectable 24% in the last year, thus enhancing its ability to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Camping World Holdings’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it’s worth checking how much of that EBIT is backed by free cash flow. In the last three years, Camping World Holdings’s free cash flow amounted to 48% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
We feel some trepidation about Camping World Holdings’s difficulty level of total liabilities, but we’ve got positives to focus on, too. To wit both its interest cover and EBIT growth rate were encouraging signs. Taking the abovementioned factors together we do think Camping World Holdings’s debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For example Camping World Holdings has 4 warning signs (and 2 which are potentially serious) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
What are the risks and opportunities for Camping World Holdings?
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.