What Investors Should Know About Constellation Software Inc.’s (TSE:CSU) Financial Strength

The size of Constellation Software Inc. (TSE:CSU), a CA$19b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, its financial health remains the key to continued success. Let’s take a look at Constellation Software’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CSU here.

Check out our latest analysis for Constellation Software

How does CSU’s operating cash flow stack up against its debt?

Over the past year, CSU has ramped up its debt from US$314m to US$399m – this includes long-term debt. With this rise in debt, CSU currently has US$456m remaining in cash and short-term investments , ready to deploy into the business. Moreover, CSU has produced cash from operations of US$616m over the same time period, leading to an operating cash to total debt ratio of 154%, indicating that CSU’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CSU’s case, it is able to generate 1.54x cash from its debt capital.

Can CSU meet its short-term obligations with the cash in hand?

At the current liabilities level of US$1.3b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x.

TSX:CSU Historical Debt December 13th 18
TSX:CSU Historical Debt December 13th 18

Can CSU service its debt comfortably?

With debt reaching 56% of equity, CSU may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. By measuring how many times CSU’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In CSU’s case, the ratio of 20.67x suggests that interest is amply covered. Large-cap investments like CSU are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

CSU’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how CSU has been performing in the past. I recommend you continue to research Constellation Software to get a more holistic view of the stock by looking at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.