Is CoStar Group (NASDAQ:CSGP) 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 can see that CoStar Group, Inc. (NASDAQ:CSGP) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CoStar Group

How Much Debt Does CoStar Group Carry?

The chart below, which you can click on for greater detail, shows that CoStar Group had US$989.5m in debt in March 2023; about the same as the year before. However, its balance sheet shows it holds US$5.06b in cash, so it actually has US$4.07b net cash.

How Healthy Is CoStar Group's Balance Sheet?

We can see from the most recent balance sheet that CoStar Group had liabilities of US$401.0m falling due within a year, and liabilities of US$1.15b due beyond that. Offsetting this, it had US$5.06b in cash and US$186.1m in receivables that were due within 12 months. So it can boast US$3.69b more liquid assets than total liabilities.

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

On the other hand, CoStar Group's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 CoStar Group's ability to maintain a healthy balance sheet going forward. 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. While CoStar Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, CoStar Group recorded free cash flow worth a fulsome 93% 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$4.07b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$370m, being 93% of its EBIT. So is CoStar Group's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for CoStar Group you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.