The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Topgolf Callaway Brands Corp. (NYSE:MODG) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Topgolf Callaway Brands's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Topgolf Callaway Brands had US$1.59b of debt in March 2024, down from US$1.66b, one year before. However, it also had US$240.2m in cash, and so its net debt is US$1.35b.
How Strong Is Topgolf Callaway Brands' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Topgolf Callaway Brands had liabilities of US$875.0m due within 12 months and liabilities of US$4.33b due beyond that. On the other hand, it had cash of US$240.2m and US$503.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.46b.
This deficit casts a shadow over the US$2.56b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Topgolf Callaway Brands would likely require a major re-capitalisation if it had to pay its creditors today.
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).
While Topgolf Callaway Brands's debt to EBITDA ratio (2.8) suggests that it uses some debt, its interest cover is very weak, at 1.1, suggesting high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. More concerning, Topgolf Callaway Brands saw its EBIT drop by 5.1% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off 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 Topgolf Callaway Brands's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Topgolf Callaway Brands burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Our View
To be frank both Topgolf Callaway Brands's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. Taking into account all the aforementioned factors, it looks like Topgolf Callaway Brands has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Topgolf Callaway Brands is showing 1 warning sign in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Betterware de MéxicoP.I. deの純負債は、EBITDAの1.7倍と非常に妥当な状態にあり、EBITは昨年3.0倍の利息負担をカバーしました。これらの数字にあまり懸念を抱く必要がないことに注意しなければなりませんが、企業の債務費用が実際に影響を与えていることについては注目に値します。Betterware de MéxicoP.I. deが昨年の14%の利益率でEBITを拡大し続けることができれば、債務負担は管理しやすくなるでしょう。バランスシートが重要なのは明らかですが、Betterware de MéxicoP.I. deが時間をかけてバランスシートを強化できるかどうかは、最終的に将来の事業の収益性によって決まります。将来に焦点を当てる場合は、アナリストの利益予測を示すこの無料レポートを確認できます。
Topgolf Callaway Brandsの借り入れからEarnings before Interest, Taxes, Depreciation, and Amortization(EBITDA)の比率(2.8)は、少しの借金を含めていることを示していますが、同社の利息カバーは1.1で非常に弱いため、高レバレッジであることを示唆しています。同社は、大きな償却費と減価償却費を負担しているため、EBITDAは本当の収益の甘い測定基準です。株主は、最近、興味費が同社に本当に影響を与えたことに注意する必要があると思われます。さらに懸念なのは、Topgolf Callaway Brandsは、過去12か月間にEBITが5.1%減少したことです。その収益の傾向が続くと、同社は借金を返済するために難しい状況に陥ることになります。債務についてはバランスシートから学ぶことができます。しかし、バランスシート外に存在するリスクもあるため、すべての企業を取り扱うことができます。Topgolf Callaway Brandsには、投資分析において「1つの警告サイン」があることに注意してください。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。