Is Copart (NASDAQ:CPRT) A Risky Investment?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Copart, Inc. (NASDAQ:CPRT) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Copart
How Much Debt Does Copart Carry?
As you can see below, at the end of October 2023, Copart had US$9.46m of debt, up from US$1.97m a year ago. Click the image for more detail. However, it does have US$2.63b in cash offsetting this, leading to net cash of US$2.62b.
A Look At Copart's Liabilities
Zooming in on the latest balance sheet data, we can see that Copart had liabilities of US$624.4m due within 12 months and liabilities of US$272.7m due beyond that. Offsetting these obligations, it had cash of US$2.63b as well as receivables valued at US$174.6m due within 12 months. So it can boast US$1.91b more liquid assets than total liabilities.
This short term liquidity is a sign that Copart could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Copart has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Copart grew its EBIT by 16% last year, making its debt load easier 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 Copart'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Copart 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 most recent three years, Copart recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Copart has net cash of US$2.62b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So is Copart's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Copart you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
