Is CoStar Group (NASDAQ:CSGP) A Risky Investment?

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 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 CoStar Group, Inc. (NASDAQ:CSGP) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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How Much Debt Does CoStar Group Carry?

The chart below, which you can click on for greater detail, shows that CoStar Group had US$988.9m in debt in September 2022; about the same as the year before. However, it does have US$4.77b in cash offsetting this, leading to net cash of US$3.79b.

A Look At CoStar Group's Liabilities

According to the last reported balance sheet, CoStar Group had liabilities of US$325.9m due within 12 months, and liabilities of US$1.17b due beyond 12 months. Offsetting these obligations, it had cash of US$4.77b as well as receivables valued at US$160.4m due within 12 months. So it actually has US$3.44b more liquid assets than total liabilities.

This short term liquidity is a sign that CoStar Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CoStar Group 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 CoStar Group has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CoStar Group'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. CoStar Group 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, CoStar Group recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case CoStar Group has US$3.79b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$325m, being 91% of its EBIT. So is CoStar Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with CoStar Group , and understanding them should be part of your investment process.

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.