These 4 Measures Indicate That Civitas Resources (NYSE:CIVI) Is Using Debt Safely

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.' 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. As with many other companies Civitas Resources, Inc. (NYSE:CIVI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Civitas Resources

What Is Civitas Resources's Net Debt?

The image below, which you can click on for greater detail, shows that Civitas Resources had debt of US$393.7m at the end of March 2023, a reduction from US$492.1m over a year. However, it does have US$556.1m in cash offsetting this, leading to net cash of US$162.4m.

How Healthy Is Civitas Resources' Balance Sheet?

According to the last reported balance sheet, Civitas Resources had liabilities of US$1.06b due within 12 months, and liabilities of US$1.52b due beyond 12 months. Offsetting these obligations, it had cash of US$556.1m as well as receivables valued at US$338.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.68b.

While this might seem like a lot, it is not so bad since Civitas Resources has a market capitalization of US$5.75b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Civitas Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Civitas Resources grew its EBIT by 314% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Civitas Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Civitas Resources 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 most recent two years, Civitas Resources recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Civitas Resources does have more liabilities than liquid assets, it also has net cash of US$162.4m. And we liked the look of last year's 314% year-on-year EBIT growth. So we don't think Civitas Resources's use of debt is risky. 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 2 warning signs for Civitas Resources you should be aware of, and 1 of them shouldn't be ignored.

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.