We Think Covetrus (NASDAQ:CVET) Has A Fair Chunk Of Debt

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. Importantly, Covetrus, Inc. (NASDAQ:CVET) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Covetrus

How Much Debt Does Covetrus Carry?

As you can see below, Covetrus had US$1.04b of debt at June 2021, down from US$1.13b a year prior. However, it does have US$230.0m in cash offsetting this, leading to net debt of about US$811.0m.

How Strong Is Covetrus' Balance Sheet?

The latest balance sheet data shows that Covetrus had liabilities of US$709.0m due within a year, and liabilities of US$1.18b falling due after that. On the other hand, it had cash of US$230.0m and US$596.0m worth of receivables due within a year. So its liabilities total US$1.06b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Covetrus has a market capitalization of US$2.79b, 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 it is future earnings, more than anything, that will determine Covetrus's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Covetrus wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to US$4.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Covetrus had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$42m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$60m of cash over the last year. 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. We've identified 2 warning signs with Covetrus , and understanding them should be part of your investment process.

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.

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.

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