Legendary fund manager Li Lu (whom 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. Above all, Equifax inc. (NYSE: EFX) carries debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Equifax’s debt?
As you can see below, at the end of September 2021, Equifax was in debt of $ 5.47 billion, up from $ 4.38 billion a year ago. Click on the image for more details. However, he also had $ 2.03 billion in cash, so his net debt is $ 3.44 billion.
NYSE: EFX Debt to Equity History October 30, 2021
A look at Equifax’s liabilities
According to the latest published balance sheet, Equifax had liabilities of US $ 1.89 billion due within 12 months and liabilities of US $ 5.64 billion due beyond 12 months. In return, he had $ 2.03 billion in cash and $ 694.6 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 4.81 billion.
Of course, Equifax has a titanic market cap of US $ 33.6 billion, so those liabilities are likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). 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).
Equifax’s net debt of 2.3 times EBITDA suggests a graceful use of debt. And the fact that her last twelve months of EBIT was 7.4 times her interest expense ties in with that theme. Importantly, Equifax has increased its EBIT by 57% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Equifax’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Equifax has recorded free cash flow of 52% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Fortunately, Equifax’s impressive EBIT growth rate means it has the upper hand over its debt. And its interest coverage is good too. Given all of this data, it seems to us that Equifax is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing 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. For example, we discovered 1 warning sign for Equifax which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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