Congratulations to investors who stuck with Callaway Golf (MODG 0.81%). Despite the stock tumbling in February and March of last year when the COVID-19 contagion began spreading all over the world, this golf-centric stock has rebounded nicely. Callaway shares are up more than 500% from last March's low and trading at just a couple bucks below record highs hit last month.

The last part of that rally is paired with surprisingly strong growth in amateur golfing. Although the pandemic shuttered courses early last year, the National Golf Foundation says the number of rounds played in the United States in 2020 was actually up 14% compared to 2019's levels. The last few months of the year saw particularly strong growth in total rounds played, driven by enthusiasts desperate for (reasonably) safe diversions. This improvement builds on 2019's reversal of a 2018 headwind. More growth is expected for the business going forward, too.

It's all an encouraging backdrop for prospective buyers of Callaway stock.

Golfer teeing up a ball on a tee.

Image source: Getty Images.

If you're in that crowd, though, you may want to hold off on making that purchase. Callaway and its brands like Jack Wolfskin and OGIO may be among the most respected in the business. But that respect doesn't quite justify the company's growing debt burden, particularly in light of its growth strategy and obscured fiscal reporting.

Moving target

Callaway Golf actually did pretty well last year. Earnings fell from $1.10 per share to $0.67 while the top line tumbled a little more than 6%. But consider the circumstances. The coronavirus made things tough, and the organization still ended the year on a particularly high note. Revenue improved 20% year over year during the fourth quarter largely thanks to strong golf club sales.

Callaway Golf is a tricky name to handicap, however, and that's not going to change anytime soon.

Take Callaway's 2017 purchases of OGIO and TravisMathew followed by its 2018 acquisition of Jack Wolfskin, for instance. They were intuitive additions, but they made it difficult to determine if the company is actually penetrating new markets or merely leveraging its existing distribution channels. Callaway hasn't teed up such details, only painting its fiscal results with broad brush strokes that break out product category and regional sales.

Look for even more fuzziness going forward. The organization just completed its $2 billion purchase of Topgolf Entertainment earlier this month, which included taking on Topgolf's $555 million worth of debt.

Callaway management also explained during its fourth-quarter earnings webcast, "We believe investment will continue to drive growth in sales and profits." The message wasn't fleshed out with an action plan, but the word "continue" implies more dealmaking lies ahead.

The point is, the company's fiscal results remain a moving target.

Expensive dealmaking

Here's what we do know: Callaway Golf hasn't turned a full-year operating profit, or a profit under generally accepted accounting principles (GAAP), in any of its past four years.

It's not necessarily the end of the world. GAAP -- or reported -- income doesn't reflect the health of a company's ongoing operation. To this end, operating or adjusted income has steadily grown. Earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $100 million in 2017 has since grown to 2020's figure of $165 million, and thanks to COVID-19, that was down from 2019's EBITDA of $210 million. Acquisitions account for the bulk of that operating income growth as well as for most of the reported GAAP losses.

Still, GAAP losses have become the norm here, when they're not supposed to be.

That operating profit growth has come at a price in other forms, too. One of them is share dilution. Callaway ended 2020 with nearly 92 million shares of the stock outstanding. Adding the 90 million shares issued to fund the Topgolf deal consummated in the meantime, however, leaves you with a big blow to future per-share metrics.

The other part of the effective cost takes the form of debt. The company was practically debt-free five years ago. Now it's got nearly $1 billion worth of long-term obligations on the books, costing it nearly $50 million in interest payments every year. Add another half-billion worth of debt to the books that Topgolf will be bringing with it. It's a heavy load for an organization that's only going to be doing about $2.7 billion worth of annual revenue once the two companies are combined.

Bottom line

Maybe it's worth it. The old adage "you have to spend money to make money" is usually true. A company's value is also more than just numbers.

It's still an awful lot of debt-supported spending, however, in an industry that's admittedly on the rebound but not exactly rebounding at a blistering speed. Mordor Intelligence estimates the golf equipment market is only going to grow at an average annual pace of about 3% for the next few years, mirroring single-digit percentage growth outlooks from other sources. So far, the only thing Callaway seems to bring to the table is a willingness to take on debt or issue stock to aggregate brands at hefty acquisition prices. That's just not enough.

The smart move here is finding a different opportunity -- at least until it's clear all this dealmaking is creating more than just the sum of its parts. Some actual GAAP profits would make for an encouraging change of pace, too.