U.S. Markets close in 51 mins

Constellation Software Inc. (TSE:CSU): Time For A Financial Health Check

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Constellation Software Inc. (TSE:CSU), a large-cap worth CA$26b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, its financial health remains the key to continued success. Today we will look at Constellation Software’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CSU here.

View our latest analysis for Constellation Software

Does CSU Produce Much Cash Relative To Its Debt?

CSU's debt levels surged from US$270m to US$544m over the last 12 months , which accounts for long term debt. With this rise in debt, CSU currently has US$717m remaining in cash and short-term investments to keep the business going. Moreover, CSU has generated cash from operations of US$688m in the last twelve months, resulting in an operating cash to total debt ratio of 126%, signalling that CSU’s current level of operating cash is high enough to cover debt.

Does CSU’s liquid assets cover its short-term commitments?

With current liabilities at US$1.9b, the company may not have an easy time meeting these commitments with a current assets level of US$1.4b, leading to a current ratio of 0.71x. The current ratio is the number you get when you divide current assets by current liabilities.

TSX:CSU Historical Debt, June 11th 2019

Does CSU face the risk of succumbing to its debt-load?

With debt reaching 64% of equity, CSU may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can assess the sustainability of CSU’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CSU's case, the ratio of 21.47x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CSU are considered a risk-averse investment.

Next Steps:

CSU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure CSU has company-specific issues impacting its capital structure decisions. I recommend you continue to research Constellation Software to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CSU’s future growth? Take a look at our free research report of analyst consensus for CSU’s outlook.
  2. Valuation: What is CSU worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CSU is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.