Is Copart (NASDAQ:CPRT) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Copart, Inc. (NASDAQ:CPRT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the US Commercial Services industry.

How Much Debt Does Copart Carry?

As you can see below, Copart had US$2.00m of debt at July 2022, down from US$397.6m a year prior. However, its balance sheet shows it holds US$1.38b in cash, so it actually has US$1.38b net cash.

A Look At Copart's Liabilities

According to the last reported balance sheet, Copart had liabilities of US$440.9m due within 12 months, and liabilities of US$242.4m due beyond 12 months. Offsetting this, it had US$1.38b in cash and US$187.8m in receivables that were due within 12 months. So it actually has US$888.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Copart could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Copart boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Copart grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 51% 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$1.38b, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. 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.

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.