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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Computacenter plc (LON:CCC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Computacenter's Net Debt?

As you can see below, Computacenter had UK£7.40m of debt at December 2024, down from UK£12.2m a year prior. However, it does have UK£489.6m in cash offsetting this, leading to net cash of UK£482.2m.

How Strong Is Computacenter's Balance Sheet?

According to the last reported balance sheet, Computacenter had liabilities of UK£2.41b due within 12 months, and liabilities of UK£137.3m due beyond 12 months. Offsetting these obligations, it had cash of UK£489.6m as well as receivables valued at UK£1.82b due within 12 months. So it has liabilities totalling UK£233.3m more than its cash and near-term receivables, combined.

Given Computacenter has a market capitalization of UK£2.72b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Computacenter boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Computacenter

But the other side of the story is that Computacenter saw its EBIT decline by 9.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Computacenter actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Computacenter's liabilities, but we can be reassured by the fact it has has net cash of UK£482.2m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in UK£386m. So we don't think Computacenter's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Computacenter is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.