CF Industries Holdings (NYSE:CF) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, CF Industries Holdings, Inc. (NYSE:CF) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 CF Industries Holdings

How Much Debt Does CF Industries Holdings Carry?

As you can see below, CF Industries Holdings had US$2.97b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$3.22b in cash to offset that, meaning it has US$252.0m net cash.

How Strong Is CF Industries Holdings' Balance Sheet?

We can see from the most recent balance sheet that CF Industries Holdings had liabilities of US$622.0m falling due within a year, and liabilities of US$4.40b due beyond that. Offsetting these obligations, it had cash of US$3.22b as well as receivables valued at US$388.0m due within 12 months. So it has liabilities totalling US$1.41b more than its cash and near-term receivables, combined.

Given CF Industries Holdings has a humongous market capitalization of US$16.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CF Industries Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact CF Industries Holdings's saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CF Industries Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CF Industries Holdings 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. During the last three years, CF Industries Holdings produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about CF Industries Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$252.0m. And it impressed us with free cash flow of US$2.7b, being 80% of its EBIT. So we don't have any problem with CF Industries Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with CF Industries Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.