Escalade (NASDAQ: ESCA) Using Too Much Debt?


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” 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. We note that Climbing, Incorporated (NASDAQ: ESCA) has a debt on its balance sheet. But does this debt concern shareholders?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for Escalade

What is Escalade’s debt?

As you can see below, at the end of March 2021, Escalade had $ 46.9 million in debt, up from none a year ago. Click on the image for more details. However, it has $ 5.88 million in cash offsetting that, leading to net debt of around $ 41.0 million.

NasdaqGM: History of debt to equity of ESCA June 8, 2021

A look at Escalade’s responsibilities

Zooming in on the latest balance sheet data, we can see that Escalade had a liability of US $ 37.7 million owed within 12 months and a liability of US $ 52.4 million owed beyond that. In return, he had $ 5.88 million in cash and $ 54.5 million in receivables due within 12 months. It therefore has a liability totaling US $ 29.7 million more than its combined cash and short-term receivables.

Of course, Escalade has a market cap of US $ 354.1 million, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.

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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Escalade’s net debt is only 0.98 times its EBITDA. And its EBIT covers 85.8 times its interest costs. So we’re pretty relaxed about its ultra-conservative use of debt. Even more impressively, Escalade increased its EBIT by 235% year over year. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Escalade can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only repay its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Considering the past three years, Escalade has indeed experienced a cash outflow, overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.

Our point of view

Escalade’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But the hard truth is that we are concerned about its conversion from EBIT to free cash flow. When we consider the range of factors above, it seems Escalade is pretty reasonable with its use of 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, we have identified 1 warning sign for Escalade that you need to be aware of.

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.

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This Simply Wall St article is general in nature. 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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