We Think CountPlus (ASX:CUP) Can Stay On Top Of Its Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CountPlus Limited (ASX:CUP) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for CountPlus
What Is CountPlus's Net Debt?
As you can see below, CountPlus had AU$4.33m of debt at June 2021, down from AU$4.72m a year prior. But it also has AU$26.2m in cash to offset that, meaning it has AU$21.9m net cash.
How Strong Is CountPlus' Balance Sheet?
We can see from the most recent balance sheet that CountPlus had liabilities of AU$299.7m falling due within a year, and liabilities of AU$35.1m due beyond that. Offsetting this, it had AU$26.2m in cash and AU$289.4m in receivables that were due within 12 months. So it has liabilities totalling AU$19.2m more than its cash and near-term receivables, combined.
Given CountPlus has a market capitalization of AU$111.6m, 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, CountPlus boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that CountPlus's EBIT was down 24% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CountPlus can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. CountPlus may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, CountPlus actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
Although CountPlus's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$21.9m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in AU$5.4m. So we are not troubled with CountPlus's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for CountPlus you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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