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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Covetrus, Inc. (NASDAQ:CVET) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Covetrus
How Much Debt Does Covetrus Carry?
The image below, which you can click on for greater detail, shows that Covetrus had debt of US$1.07b at the end of December 2020, a reduction from US$1.19b over a year. However, it does have US$290.0m in cash offsetting this, leading to net debt of about US$783.0m.
A Look At Covetrus' Liabilities
According to the last reported balance sheet, Covetrus had liabilities of US$691.0m due within 12 months, and liabilities of US$1.23b due beyond 12 months. Offsetting these obligations, it had cash of US$290.0m as well as receivables valued at US$574.0m due within 12 months. So it has liabilities totalling US$1.06b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Covetrus has a market capitalization of US$4.19b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Covetrus can strengthen its balance sheet over time. 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, Covetrus reported revenue of US$4.3b, which is a gain of 9.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Covetrus produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$54m 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$5.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example - Covetrus has 3 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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About NasdaqGM:CVET
Covetrus
Covetrus, Inc., together with its subsidiaries, operates as an animal-health technology and services company.
Good value with adequate balance sheet.