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Investors are always looking for growth in small-cap stocks like Malibu Boats, Inc. (NASDAQ:MBUU), with a market cap of US$755m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into MBUU here.
Does MBUU produce enough cash relative to debt?
Over the past year, MBUU has maintained its debt levels at around US$109m including long-term debt. At this constant level of debt, MBUU’s cash and short-term investments stands at US$72m for investing into the business. Additionally, MBUU has generated cash from operations of US$67m in the last twelve months, leading to an operating cash to total debt ratio of 61%, signalling that MBUU’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MBUU’s case, it is able to generate 0.61x cash from its debt capital.
Can MBUU meet its short-term obligations with the cash in hand?
At the current liabilities level of US$69m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.19x. For Leisure companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does MBUU face the risk of succumbing to its debt-load?
With debt reaching 71% of equity, MBUU may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if MBUU’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MBUU, the ratio of 19.02x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MBUU’s high interest coverage is seen as responsible and safe practice.
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Although MBUU’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MBUU has been performing in the past. I recommend you continue to research Malibu Boats to get a more holistic view of the small-cap by looking at: