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While small-cap stocks, such as Malibu Boats, Inc. (NASDAQ:MBUU) with its market cap of US$839m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into MBUU here.

MBUU’s Debt (And Cash Flows)

MBUU has built up its total debt levels in the last twelve months, from US$108m to US$129m , which accounts for long term debt. With this growth in debt, MBUU's cash and short-term investments stands at US$15m , ready to be used for running the business. Additionally, MBUU has produced US$58m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 45%, indicating that MBUU’s current level of operating cash is high enough to cover debt.

Does MBUU’s liquid assets cover its short-term commitments?

Looking at MBUU’s US$83m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$133m, leading to a 1.61x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Leisure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can MBUU service its debt comfortably?

With a debt-to-equity ratio of 68%, MBUU can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether MBUU is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MBUU's, case, the ratio of 16.25x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MBUU ample headroom to grow its debt facilities.

Next Steps:

MBUU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how MBUU has been performing in the past. You should continue to research Malibu Boats to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for MBUU’s future growth? Take a look at our free research report of analyst consensus for MBUU’s outlook.

2. Valuation: What is MBUU worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MBUU is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.