Copart (NASDAQ:CPRT) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Copart, Inc. (NASDAQ:CPRT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Copart

How Much Debt Does Copart Carry?

The chart below, which you can click on for greater detail, shows that Copart had US$403.8m in debt in January 2022; about the same as the year before. However, its balance sheet shows it holds US$1.35b in cash, so it actually has US$942.7m net cash.

A Look At Copart's Liabilities

According to the last reported balance sheet, Copart had liabilities of US$417.9m due within 12 months, and liabilities of US$629.2m due beyond 12 months. Offsetting this, it had US$1.35b in cash and US$139.2m in receivables that were due within 12 months. So it can boast US$438.6m more liquid assets than total liabilities.

This state of affairs indicates that Copart's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$26.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Copart has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Copart has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Copart'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.

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. Looking at the most recent three years, Copart recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Copart has net cash of US$942.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 44% year-on-year EBIT growth. So is Copart's debt a risk? It doesn't seem so to us. We'd be very excited to see if Copart insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.