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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CoStar Group, Inc. (NASDAQ:CSGP) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 CoStar Group
How Much Debt Does CoStar Group Carry?
The image below, which you can click on for greater detail, shows that at March 2021 CoStar Group had debt of US$987.0m, up from US$745.0m in one year. However, it does have US$3.69b in cash offsetting this, leading to net cash of US$2.70b.
A Look At CoStar Group's Liabilities
Zooming in on the latest balance sheet data, we can see that CoStar Group had liabilities of US$290.1m due within 12 months and liabilities of US$1.20b due beyond that. Offsetting this, it had US$3.69b in cash and US$109.8m in receivables that were due within 12 months. So it actually has US$2.31b more liquid assets than total liabilities.
This surplus suggests that CoStar Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CoStar Group has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, CoStar Group saw its EBIT drop by 9.1% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CoStar Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CoStar Group 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, CoStar Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.