We Think Computacenter (LON:CCC) Can Stay On Top Of Its Debt

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?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Computacenter Carry?

As you can see below, Computacenter had UK£9.50m of debt at June 2024, down from UK£16.5m a year prior. However, it does have UK£411.4m in cash offsetting this, leading to net cash of UK£401.9m.

How Healthy Is Computacenter's Balance Sheet?

We can see from the most recent balance sheet that Computacenter had liabilities of UK£1.85b falling due within a year, and liabilities of UK£129.5m due beyond that. On the other hand, it had cash of UK£411.4m and UK£1.58b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Computacenter's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£2.64b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Computacenter has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Computacenter has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Computacenter can strengthen its balance sheet over time. 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. Over the last three years, Computacenter actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Computacenter has UK£401.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£263m, being 107% of its EBIT. So we don't have any problem with Computacenter's use of debt. 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. Be aware that Computacenter is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.