Does holding company CommScope (NASDAQ: COMM) have a healthy balance sheet?
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, CommScope Holding Company, Inc. (NASDAQ: COMM) is in debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
What is the debt of CommScope Holding Company?
The image below, which you can click for more details, shows that CommScope Holding Company had a debt of US $ 9.52 billion at the end of June 2021, a reduction from $ 9.98 billion US over one year. However, given that it has a cash reserve of US $ 446.2 million, its net debt is less, at around US $ 9.07 billion.
NasdaqGS: COMM Historical Debt to Equity October 18, 2021
How strong is CommScope Holding Company’s balance sheet?
The latest balance sheet data shows that CommScope Holding Company had liabilities of US $ 2.10 billion due within one year, and liabilities of US $ 10.2 billion due thereafter. On the other hand, he had cash of US $ 446.2 million and receivables of US $ 1.65 billion within a year. It therefore has liabilities totaling $ 10.2 billion more than its cash and short-term receivables combined.
This deficit casts a shadow over the $ 2.48 billion company like a colossus towering over mere mortals. So we would be watching its record closely, without a doubt. After all, CommScope Holding Company would likely need a major recapitalization if it were to pay its creditors today.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Low interest coverage of 0.65 times and an unusually high Net Debt / EBITDA ratio of 7.8 affected our confidence in CommScope Holding Company like a punch in the gut. This means that we would consider him to be in heavy debt. However, it should be heartwarming for shareholders to remember that CommScope Holding Company has actually increased its EBIT by 175% over the past 12 months. If this earnings trend continues, its debt load will be much more manageable in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine CommScope Holding Company’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, CommScope Holding Company has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
To be frank, CommScope Holding Company’s interest coverage and track record of controlling its total liabilities make us rather uncomfortable with its debt levels. But on the positive side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think the debt makes the shares of CommScope Holding Company a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for CommScope Holding Company you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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