Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Vail Resorts, Inc. (NYSE:MTN) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest review for Vail Resorts
How much debt does Vail Resorts have?
As you can see below, at the end of October 2021, Vail Resorts had $2.47 billion in debt, up from $2.10 billion a year ago. Click on the image for more details. On the other hand, it has $1.47 billion in cash, resulting in a net debt of around $1.00 billion.
A look at the responsibilities of Vail Resorts
The latest balance sheet data shows that Vail Resorts had liabilities of $1.27 billion due within the year, and liabilities of $3.36 billion due thereafter. On the other hand, it had cash of $1.47 billion and $109.0 million in receivables within one year. Thus, its liabilities total $3.05 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not too bad since Vail Resorts has a huge market capitalization of US$11.1 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
While Vail Resorts has a fairly reasonable net debt to EBITDA ratio of 1.9, its interest coverage appears low at 1.8. This suggests that the company is paying quite high interest rates. Regardless, there is no doubt that the stock uses significant leverage. Importantly, Vail Resorts has grown its EBIT by 31% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But future earnings, more than anything, will determine Vail Resorts’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Fortunately for all shareholders, Vail Resorts has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
Vail Resorts’ conversion of EBIT to free cash flow suggests it can manage debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But we have to admit that we find that its interest coverage has the opposite effect. Given all of this data, it seems to us that Vail Resorts is taking a pretty sensible approach to debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 3 warning signs we scouted with Vail Resorts (including 1 which is of concern).
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.