The CoStar Group (NASDAQ: CSGP) has a rock solid balance sheet

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, CoStar Group, Inc. (NASDAQ: CSGP) is in debt. But the most important question is: what risk does this debt create?

When is debt a problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

What is the net debt of the CoStar group?

The graph below, which you can click for more details, shows that the CoStar Group had $ 987.6 million in debt as of September 2021; about the same as the year before. But on the other hand, it also has $ 3.76 billion in cash, which leads to a net cash position of $ 2.77 billion.

NasdaqGS: History of CSGP Debt vs. Equity November 24, 2021

A look at the responsibilities of the CoStar group

The latest balance sheet data shows that the CoStar Group had debts of US $ 321.5 million due within one year, and US $ 1.21 billion of debts due after that. In return, he had $ 3.76 billion in cash and $ 115.7 million in receivables due within 12 months. So he actually has US $ 2.35 billion Following liquid assets as total liabilities.

This short-term liquidity is a sign that CoStar Group could likely repay its debt with ease, as its balance sheet is far from tight. In short, the CoStar Group has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!

The good news is that CoStar Group increased its EBIT by 3.6% year over year, which should allay concerns about debt repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine CoStar Group’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, a business needs free cash flow to repay its debts; accounting profits are not enough. Although the CoStar Group has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) this cash balance. Over the past three years, the CoStar Group has actually generated more free cash flow than EBIT. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.

In summary

While it’s always a good idea to investigate a company’s debt, in this case the CoStar Group has US $ 2.77 billion in net cash and a decent looking balance sheet. And he impressed us with free cash flow of US $ 299 million, or 107% of his EBIT. So is CoStar Group’s debt a risk? It does not seem to us. 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 1 warning sign for the CoStar group you should know.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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