Computacenter (LON: CCC) could easily take on more debt
David Iben put it right when he said: âVolatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Computacenter plc (LON: CCC) uses debt. But the most important question is: what is the risk that this debt creates?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, many companies use debt to finance growth without any negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Computacenter
What is Computacenter’s debt?
As you can see below, at the end of December 2020, Computacenter had a debt of Â£ 121.2million in the UK, up from Â£ 80.8million a year ago. Click on the image for more details. But on the other hand, it also has Â£ 309.8million in cash, which leads to a UK net cash position of Â£ 188.7million.
A look at the responsibilities of Computacenter
According to the latest published balance sheet, Computacenter had liabilities of Â£ 1.59 billion due within 12 months and liabilities of Â£ 184.7 million beyond 12 months. On the other hand, he had Â£ 309.8million in cash and Â£ 1.23 billion in receivables due within a year. As a result, its liabilities total Â£ 229.8 million more than the combination of its cash and short-term receivables.
Of course, Computacenter has a market cap of Â£ 2.96 billion, so those liabilities are likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable commitments, Computacenter has a net cash flow, so it’s fair to say that it doesn’t have heavy debt!
Additionally, we are pleased to report that Computacenter has increased its EBIT by 31%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Computacenter’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. While Computacenter has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past three years, Computacenter has recorded free cash flow totaling 95% of its EBIT, which is stronger than we usually expected. This puts him in a very strong position to pay off his debt.
We could understand if investors are concerned about Computacenter’s responsibilities, but we can take comfort in the fact that it has net cash of Â£ 188.7million. The icing on the cake was to convert 95% of that EBIT into free cash flow, which brought in Â£ 209million in the UK. So is Computacenter’s debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Computacenter (at least 1, which is a bit worrying), and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash-flow net-growth stocks right now.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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