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Does Constellation Software Inc’s (TSE:CSU) Debt Level Pose A Problem?

Kevin Zeng

Constellation Software Inc (TSX:CSU), a large-cap worth CA$16.70B, 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. However, its financial health remains the key to continued success. I will provide an overview of Constellation Software’s financial liquidity and leverage to give you an idea of Constellation Software’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CSU here. Check out our latest analysis for Constellation Software

Does CSU produce enough cash relative to debt?

Over the past year, CSU has maintained its debt levels at around $346.6M – this includes both the current and long-term debt. At this constant level of debt, CSU’s cash and short-term investments stands at $357.7M for investing into the business. Additionally, CSU has produced $490.9M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 141.64%, indicating that CSU’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CSU’s case, it is able to generate 1.42x cash from its debt capital.

Can CSU pay its short-term liabilities?

Looking at CSU’s most recent $873.2M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of $773.7M, with a current ratio of 0.89x below the prudent level of 3x.

TSX:CSU Historical Debt Jan 24th 18

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

CSU is a relatively highly levered company with a debt-to-equity of 57.13%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times CSU’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For CSU, the ratio of 16.58x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CSU and other large-cap investments thought to be safe.

Next Steps:

Although CSU’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how CSU has been performing in the past. I recommend you continue to research Constellation Software to get a better picture of the stock by looking at:

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.