Copart (NASDAQ:CPRT) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Copart, Inc. (NASDAQ:CPRT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Copart

How Much Debt Does Copart Carry?

The image below, which you can click on for greater detail, shows that Copart had debt of US$1.97m at the end of October 2022, a reduction from US$408.9m over a year. But it also has US$1.54b in cash to offset that, meaning it has US$1.54b net cash.

A Look At Copart's Liabilities

We can see from the most recent balance sheet that Copart had liabilities of US$504.5m falling due within a year, and liabilities of US$236.4m due beyond that. Offsetting these obligations, it had cash of US$1.54b as well as receivables valued at US$157.6m due within 12 months. So it actually has US$956.1m more liquid assets than total liabilities.

This surplus suggests that Copart has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Copart boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Copart grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Copart can strengthen its balance sheet over time. 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. Copart 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 most recent three years, Copart recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Copart has net cash of US$1.54b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we don't think Copart's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Copart, you may well want to click here to check an interactive graph of its earnings per share history.

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.