Yahoo Finance Collectors Universe (NASDAQ:CLCT) Has A Rock Solid Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Collectors Universe, Inc. (NASDAQ:CLCT) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Collectors Universe
What Is Collectors Universe's Net Debt?
The image below, which you can click on for greater detail, shows that Collectors Universe had debt of US$2.44m at the end of June 2019, a reduction from US$3.00m over a year. But on the other hand it also has US$19.2m in cash, leading to a US$16.8m net cash position.
How Strong Is Collectors Universe's Balance Sheet?
The latest balance sheet data shows that Collectors Universe had liabilities of US$13.3m due within a year, and liabilities of US$5.45m falling due after that. Offsetting these obligations, it had cash of US$19.2m as well as receivables valued at US$2.41m due within 12 months. So it can boast US$2.89m more liquid assets than total liabilities.
Having regard to Collectors Universe's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$232.7m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Collectors Universe has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Collectors Universe grew its EBIT by 50% 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 Collectors Universe's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Collectors Universe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Collectors Universe recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Collectors Universe has net cash of US$17m, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$16m. So we don't think Collectors Universe's use of debt is risky. Another factor that would give us confidence in Collectors Universe would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
