Copart (NASDAQ:CPRT) Seems To Use Debt Quite Sensibly
Howard Marks put it well when he said, instead of worrying about stock price volatility, "The possibility of permanent loss is the risk I'm concerned about ... and every practical investor I know takes to worry." It is only natural to consider a company's balance sheet when investigating how risky it is, as debt often arises when a company collapses. As with many other companies, Copart, Inc. (NASDAQ: CPRT) leverages debt. But the more important question is, what is the risk of incurring this debt?
When is debt dangerous?
In general, debt only becomes a real problem if a company cannot pay it off simply by raising capital or using its own cash flow. When things get really bad, lenders can take control of the business. However, a more common (but still costly) occurrence is when a company needs to issue stocks at cheap prices and permanently dilute shareholders in order to prop up its balance sheet. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces the dilution in a company that is capable of reinvesting with high returns. When examining debt, we first look at both cash and debt levels together.
Check out our latest analysis for Copart
How much debt does Copart owe?
The graph below, which you can click for more details, shows that Copart was in debt of $ 396.5 million as of July 2020. about the same as the year before. However, the balance sheet shows that the company holds $ 477.7 million in cash, so it actually has $ 81.2 million net in cash.
Debt Equity History Analysis
How healthy is Copart's record?
The most recent balance sheet shows that Copart had debt of $ 356.0 million due in one year and that $ 609.7 million of debt exceeded that. On the flip side, it had $ 477.7 million in cash and $ 116.8 million in receivables due within one year. So the debt is $ 371.3 million more than the combination of cash and short-term receivables.
Given the size of Copart, it appears that cash is well balanced with total liabilities. While it's hard to imagine the $ 27.2 billion company battling for cash, we still think it makes sense to monitor its balance sheet. Copart has notable liabilities, but it also has more cash than debt. So we're pretty confident that Copart can safely manage its debt.
We also note that Copart increased EBIT by 14% last year, which made it easier to manage its debt burden. There is no doubt that we learn the most about debt from the balance sheet. Ultimately, however, the future profitability of the business will determine whether Copart can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, this free analyst earnings forecast report might be of interest.
But our final consideration is also important because a company cannot pay debts with paper profits. it takes hard cash. While Copart has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) to free cash flow to understand how quickly it can get that cash balance builds up (or undermines). For the past three years, Copart had free cash flow of 40% of its EBIT, which is weaker than expected. This weak cash conversion makes it difficult to deal with debt.
We could understand if investors are concerned about Copart's liabilities, but we can rest assured that the company has a net present value of $ 81.2 million. In addition, EBIT increased by 14% last year. So is Copart's debt a risk? It doesn't seem like that to us. Clearly, the balance sheet is the area to focus on when analyzing debt. Ultimately, however, any business may have off-balance sheet risks. Note that Copart shows 1 warning sign in our investment analysis. You should know that ...
After all that, if you're more interested in a fast-growing company with a solid balance sheet, be sure to check out our list of net cash growth stocks right now.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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