Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, CDW Holding Limited (SGX:BXE) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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 CDW Holding
What is CDW Holding’s debt?
You can click on the chart below for historical numbers, but it shows CDW Holding had US$10.8 million in debt in December 2021, up from US$13.3 million a year prior. However, he has $28.9 million in cash to offset this, which translates to net cash of $18.1 million.
A look at the liabilities of CDW Holding
According to the last published balance sheet, CDW Holding had liabilities of $53.9 million due within 12 months and liabilities of $4.19 million due beyond 12 months. In compensation for these obligations, it had cash of US$28.9 million as well as receivables valued at US$38.6 million and maturing within 12 months. So he actually has US$9.39 million After liquid assets than total liabilities.
It’s good to see that CDW Holding has plenty of cash on its balance sheet, suggesting careful liability management. Due to her strong net asset position, she is unlikely to run into problems with her lenders. Simply put, the fact that CDW Holding has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, CDW Holding has grown its EBIT by 45% in the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since CDW Holding will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although CDW Holding has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past two years, CDW Holding has generated free cash flow of a very strong 89% of its EBIT, more than expected. This positions him well to pay off debt if desired.
While it’s always a good idea to investigate a company’s debt, in this case CDW Holding has $18.1 million in net cash and a decent balance sheet. The icing on the cake was converting 89% of that EBIT into free cash flow, bringing in US$2.3 million. Ultimately, we don’t find CDW Holding’s debt levels at all concerning. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Be aware that CDW Holding displays 2 warning signs in our investment analysis and 1 of them makes us a little uncomfortable…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.