Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. As with many other companies Covia Holdings Corporation (NYSE:CVIA) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does Covia Holdings Carry?
As you can see below, Covia Holdings had US$1.64b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had US$112.1m in cash, and so its net debt is US$1.52b.
How Strong Is Covia Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Covia Holdings had liabilities of US$373.0m due within 12 months and liabilities of US$2.29b due beyond that. On the other hand, it had cash of US$112.1m and US$317.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.24b.
This deficit casts a shadow over the US$196.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Covia Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Covia Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Covia Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by18%, to US$1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Covia Holdings had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$31m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$424m in the last year. So we think buying this stock is risky, like walking through a minefield with a mask on. For riskier companies like Covia Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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