November 26, 2021

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Does Fox Factory Holding (NASDAQ:FOXF) Have A Healthy Balance Sheet?

Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fox Factory Holding Corp. (NASDAQ:FOXF) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Fox Factory Holding

What Is Fox Factory Holding’s Debt?

The chart below, which you can click on for greater detail, shows that Fox Factory Holding had US$380.6m in debt in October 2021; about the same as the year before. On the flip side, it has US$319.3m in cash leading to net debt of about US$61.3m.

NasdaqGS:FOXF Debt to Equity History November 9th 2021

How Strong Is Fox Factory Holding’s Balance Sheet?

We can see from the most recent balance sheet that Fox Factory Holding had liabilities of US$269.9m falling due within a year, and liabilities of US$393.6m due beyond that. Offsetting these obligations, it had cash of US$319.3m as well as receivables valued at US$159.5m due within 12 months. So it has liabilities totalling US$184.7m more than its cash and near-term receivables, combined.

Since publicly traded Fox Factory Holding shares are worth a total of US$7.52b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Fox Factory Holding has a very light debt load indeed.

We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Fox Factory Holding’s net debt is only 0.26 times its EBITDA. And its EBIT covers its interest expense a whopping 22.6 times over. So we’re pretty relaxed about its super-conservative use of debt. On top of that, Fox Factory Holding grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fox Factory Holding’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. In the last three years, Fox Factory Holding’s free cash flow amounted to 36% of its EBIT, less than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Fox Factory Holding’s impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Zooming out, Fox Factory Holding seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 2 warning signs for Fox Factory Holding that you should be aware of.

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

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.

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