David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, YETI Holdings, Inc. (NYSE:YETI) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is YETI Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that YETI Holdings had US$82.3m in debt in June 2024; about the same as the year before. But it also has US$212.9m in cash to offset that, meaning it has US$130.6m net cash.

A Look At YETI Holdings' Liabilities

According to the last reported balance sheet, YETI Holdings had liabilities of US$351.9m due within 12 months, and liabilities of US$174.6m due beyond 12 months. On the other hand, it had cash of US$212.9m and US$159.1m worth of receivables due within a year. So its liabilities total US$154.5m more than the combination of its cash and short-term receivables.

Of course, YETI Holdings has a market capitalization of US$3.07b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, YETI Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that YETI Holdings grew its EBIT by 180% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if YETI Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. YETI Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, YETI Holdings's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about YETI Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$130.6m. And it impressed us with its EBIT growth of 180% over the last year. So we don't think YETI Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in YETI Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.