CSG Systems International (NASDAQ: CSGS) has a fairly healthy track record
Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies CSG Systems International, Inc. (NASDAQ: CSGS) uses debt. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for CSG Systems International
What is the debt of CSG Systems International?
As you can see below, CSG Systems International had $ 349.6 million in debt, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, because it has a cash reserve of US $ 205.1 million, its net debt is less, at approximately US $ 144.5 million.
A look at the liabilities of CSG Systems International
The latest balance sheet data shows that CSG Systems International had liabilities of US $ 587.7 million due within one year, and liabilities of US $ 259.0 million due thereafter. In return, he had $ 205.1 million in cash and $ 290.2 million in receivables due within 12 months. Its liabilities therefore total $ 351.4 million more than the combination of its cash and short-term receivables.
CSG Systems International has a market capitalization of US $ 1.37 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look whether it can manage its debt without dilution.
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).
With net debt of just 0.88 times EBITDA, CSG Systems International is arguably fairly cautious. And it has 7.7 times interest coverage, which is more than enough. While CSG Systems International does not appear to have gained much on the EBIT line, at least profits remain stable for now. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether CSG Systems International can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, CSG Systems International has recorded free cash flow totaling 82% of its EBIT, which is higher than what we normally expect. This positions it well to repay debt if it is desirable.
Our point of view
Fortunately, CSG Systems International’s impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. And that’s just the start of the good news as its net debt to EBITDA is also very encouraging. When we consider the range of factors above, it seems CSG Systems International is being fairly reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 4 warning signs we spotted with CSG Systems International.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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