These 4 Measures Indicate That Computacenter (LON:CCC) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Computacenter plc (LON:CCC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Computacenter

What Is Computacenter's Net Debt?

The image below, which you can click on for greater detail, shows that Computacenter had debt of UK£30.8m at the end of December 2022, a reduction from UK£43.8m over a year. But it also has UK£275.1m in cash to offset that, meaning it has UK£244.3m net cash.

How Strong Is Computacenter's Balance Sheet?

According to the last reported balance sheet, Computacenter had liabilities of UK£2.25b due within 12 months, and liabilities of UK£161.4m due beyond 12 months. Offsetting this, it had UK£275.1m in cash and UK£1.86b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£270.1m.

Given Computacenter has a market capitalization of UK£2.60b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Computacenter also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Computacenter doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Computacenter's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£244.3m. And it impressed us with free cash flow of UK£207m, being 86% of its EBIT. So is Computacenter's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Computacenter you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.