Here’s Why Casella Waste Systems (NASDAQ: CWST) Can Responsibly Manage Debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Casella Waste Systems, Inc. (NASDAQ: CWST) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then 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 share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
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What is the net debt of Casella Waste Systems?
As you can see below, Casella Waste Systems owed US $ 514.3 million in debt, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. On the other hand, it has $ 46.5 million in cash, resulting in net debt of around $ 467.8 million.
How healthy is Casella Waste Systems’ balance sheet?
The most recent balance sheet shows that Casella Waste Systems had liabilities of US $ 178.4 million due within one year and liabilities of US $ 694.1 million due beyond. On the other hand, he had $ 46.5 million in cash and $ 90.5 million in receivables within a year. Its liabilities therefore total US $ 735.5 million more than the combination of its cash and short-term receivables.
Given that the listed shares of Casella Waste Systems are worth a total of US $ 4.46 billion, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt over earnings with and without amortization charges.
Casella Waste Systems’ debt is 2.6 times its EBITDA and its EBIT covers its interest expense 3.8 times. This suggests that while debt levels are significant, we would stop calling them problematic. On a lighter note, we note that Casella Waste Systems has increased its EBIT by 23% over the past year. If he manages to maintain this kind of improvement, his debt load will begin to melt like glaciers in a warming world. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Casella Waste Systems’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Casella Waste Systems has recorded free cash flow representing 52% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Fortunately, Casella Waste Systems’ impressive EBIT growth rate means that it has the upper hand over its debt. But, on a darker note, we’re a little concerned about its coverage of interest. All these things considered, it looks like Casella Waste Systems can comfortably manage its current debt levels. On the plus side, this leverage can increase returns for shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Casella Waste Systems you should know.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 material. Simply Wall St has no position in the mentioned stocks.
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