Is Verisk Analytics (NASDAQ:VRSK) A Risky Investment?

Simply Wall St
December 20, 2021
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Verisk Analytics, Inc. (NASDAQ:VRSK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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 Verisk Analytics

What Is Verisk Analytics's Debt?

The chart below, which you can click on for greater detail, shows that Verisk Analytics had US$3.10b in debt in September 2021; about the same as the year before. On the flip side, it has US$306.7m in cash leading to net debt of about US$2.79b.

NasdaqGS:VRSK Debt to Equity History December 20th 2021

How Strong Is Verisk Analytics' Balance Sheet?

According to the last reported balance sheet, Verisk Analytics had liabilities of US$1.84b due within 12 months, and liabilities of US$3.09b due beyond 12 months. On the other hand, it had cash of US$306.7m and US$489.0m worth of receivables due within a year. So its liabilities total US$4.13b more than the combination of its cash and short-term receivables.

Since publicly traded Verisk Analytics shares are worth a very impressive total of US$35.8b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With a debt to EBITDA ratio of 2.1, Verisk Analytics uses debt artfully but responsibly. And the alluring interest cover (EBIT of 8.0 times interest expense) certainly does not do anything to dispel this impression. We saw Verisk Analytics grow its EBIT by 8.5% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Verisk Analytics'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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Verisk Analytics generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Verisk Analytics's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And its interest cover is good too. Taking all this data into account, it seems to us that Verisk Analytics takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Verisk Analytics that you should be aware of before investing here.

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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