Yahoo Finance We Think Computacenter (LON:CCC) Can Manage Its Debt With Ease
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Computacenter plc (LON:CCC) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Computacenter
What Is Computacenter's Debt?
The image below, which you can click on for greater detail, shows that Computacenter had debt of UK£42.3m at the end of June 2021, a reduction from UK£72.9m over a year. However, it does have UK£164.2m in cash offsetting this, leading to net cash of UK£121.9m.
How Healthy Is Computacenter's Balance Sheet?
We can see from the most recent balance sheet that Computacenter had liabilities of UK£1.42b falling due within a year, and liabilities of UK£196.3m due beyond that. Offsetting this, it had UK£164.2m in cash and UK£1.22b in receivables that were due within 12 months. So it has liabilities totalling UK£230.8m more than its cash and near-term receivables, combined.
Of course, Computacenter has a market capitalization of UK£3.10b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Computacenter boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Computacenter has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Computacenter's ability to maintain a healthy balance sheet going forward. 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. Computacenter 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. During the last three years, Computacenter generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Computacenter has UK£121.9m in net cash. And it impressed us with free cash flow of UK£162m, being 82% of its EBIT. So we don't think Computacenter's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Computacenter (including 1 which is significant) .
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.
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.
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