We think Covetrus (NASDAQ: CVET) has a good deal of debt

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David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Covetrus, Inc. (NASDAQ: CVET) is in debt. But should shareholders be worried about its use of debt?

When Is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.

See our latest review for Covetrus

How much debt does Covetrus have?

As you can see below, Covetrus was in debt of US $ 1.04 billion in June 2021, up from US $ 1.13 billion the year before. However, it has $ 230.0 million in cash offsetting this, leading to net debt of around $ 811.0 million.

NasdaqGS: CVET History of debt to equity October 21, 2021

How strong is Covetrus’ balance sheet?

The latest balance sheet data shows that Covetrus had liabilities of US $ 709.0 million due within one year, and liabilities of US $ 1.18 billion due after that. On the other hand, it had $ 230.0 million in cash and $ 596.0 million in less than one year receivables. Its liabilities therefore total US $ 1.06 billion more than the combination of its cash and short-term receivables.

While that may sound like a lot, it isn’t that big of a deal since Covetrus has a market capitalization of US $ 2.79 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Covetrus’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over the past year, Covetrus has not been profitable in terms of EBIT, but has managed to increase its revenue by 10% to US $ 4.5 billion. We generally like to see unprofitable businesses growing faster, but each in their own way.

Emptor Warning

It is important to note that Covetrus has recorded a loss of profit before interest and taxes (EBIT) over the past year. To be precise, the EBIT loss amounted to US $ 42 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. However, it doesn’t help that he spent $ 60 million in cash in the past year. Suffice it to say that we consider the action risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Covetrus and understanding them should be part of your investment process.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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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