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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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Clarivate Analytics Plc (NYSE:CCC) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Clarivate Analytics’s Net Debt?
The chart below, which you can click on for greater detail, shows that Clarivate Analytics had US$1.96b in debt in March 2019; about the same as the year before. And it doesn’t have much cash, so its net debt is about the same.
How Strong Is Clarivate Analytics’s Balance Sheet?
We can see from the most recent balance sheet that Clarivate Analytics had liabilities of US$711.3m falling due within a year, and liabilities of US$2.08b due beyond that. Offsetting this, it had US$28.0m in cash and US$343.1m in receivables that were due within 12 months. So its liabilities total US$2.42b more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Clarivate Analytics is worth US$4.60b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Either way, since Clarivate Analytics does have more debt than cash, it’s worth keeping an eye on its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Clarivate 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.
Over 12 months, Clarivate Analytics reported revenue of US$965m, which is a gain of 3.8%. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Clarivate Analytics had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$70m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$60m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Clarivate Analytics’s profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.