Does Covenant Logistics Group (NASDAQ: CVLG) have a healthy balance sheet?

Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We note that Covenant Logistics Group, Inc. (NASDAQ: CVLG) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

What is the net debt of Covenant Logistics Group?

As you can see below, Covenant Logistics Group had a debt of US $ 45.7 million in June 2021, up from US $ 270.1 million the year before. However, given that it has a cash reserve of US $ 4.97 million, its net debt is less, at around US $ 40.7 million.

NasdaqGS: CVLG History of debt to equity August 22, 2021

How strong is the balance sheet of Covenant Logistics Group?

We can see from the most recent balance sheet that Covenant Logistics Group had liabilities of US $ 179.4 million maturing within one year and liabilities of US $ 170.8 million maturing within one year. of the. On the other hand, he had $ 4.97 million in cash and $ 127.5 million in receivables due within one year. It therefore has a liability totaling US $ 217.8 million more than its cash and short-term receivables combined.

Covenant Logistics Group has a market capitalization of US $ 379.3 million, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With net debt of just 0.43 times EBITDA, Covenant Logistics Group is arguably fairly cautious. And this view is underpinned by the strong interest coverage, with EBIT reaching 9.2 times last year’s interest expense. It was also good to see that despite losing money on the EBIT line last year, Covenant Logistics Group has turned things around over the past 12 months, delivering EBIT of US $ 40 million. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Covenant Logistics Group can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Regarding the most recent year, Covenant Logistics Group recorded free cash flow of 30% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Our point of view

The net debt on EBITDA of the Covenant Logistics group was a real asset in this analysis, as was its interest coverage. On the other hand, its conversion of EBIT into free cash flow makes us a little less comfortable with its debt. Looking at all of this data, we feel a little cautious about Covenant Logistics Group debt levels. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. Of course, we wouldn’t say no to the extra trust we would gain if we knew that Covenant Logistics Group insiders were buying stocks: if you’re on the same page, you can find out if insiders buy by clicking on this link.

At the end of the day, it’s often best to focus on businesses that don’t have 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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