U.S. Markets closed

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

Mercedes Harden

Investors pursuing a solid, dependable stock investment can often be led to Constellation Software Inc (TSX:CSU), a large-cap worth CA$20.96B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, 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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CSU here. Check out our latest analysis for Constellation Software

Does CSU produce enough cash relative to debt?

CSU’s debt level has been constant at around US$332.86M over the previous year comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$488.96M , ready to deploy into the business. Additionally, CSU has generated US$527.76M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 158.55%, signalling that CSU’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CSU’s case, it is able to generate 1.59x cash from its debt capital.

Can CSU pay its short-term liabilities?

With current liabilities at US$1.17B, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.85x, which is below the prudent industry ratio of 3x.

TSX:CSU Historical Debt May 25th 18

Is CSU’s debt level acceptable?

With debt reaching 42.39% of equity, CSU may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if CSU’s debt levels are sustainable by measuring interest payments against earnings of a company. 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 18.11x suggests that interest is comfortably 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:

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 low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for CSU’s financial health. Other important fundamentals need to be considered alongside. I suggest 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.


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.