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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Constellation Software Inc. (TSE:CSU) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Constellation Software
How Much Debt Does Constellation Software Carry?
The image below, which you can click on for greater detail, shows that Constellation Software had debt of US$450.0m at the end of December 2020, a reduction from US$495.0m over a year. But it also has US$767.0m in cash to offset that, meaning it has US$317.0m net cash.
How Healthy Is Constellation Software's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Constellation Software had liabilities of US$2.04b due within 12 months and liabilities of US$1.29b due beyond that. On the other hand, it had cash of US$767.0m and US$675.0m worth of receivables due within a year. So its liabilities total US$1.89b more than the combination of its cash and short-term receivables.
Since publicly traded Constellation Software shares are worth a very impressive total of US$31.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Constellation Software boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Constellation Software grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Constellation Software'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.