Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries ”. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Corteva, Inc. (NYSE: CTVA) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt 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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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.
See our latest review for Corteva
What is Corteva’s debt?
The image below, which you can click for more details, shows that as of December 2020, Corteva was in debt of $ 1.10 billion, up from $ 113.0 million in a year. But on the other hand, it also has US $ 3.80B in cash, which leads to a net cash position of US $ 2.70B.
A look at Corteva’s responsibilities
The latest balance sheet data shows that Corteva had liabilities of US $ 8.55 billion due within one year, and liabilities of US $ 9.04 billion thereafter. In return for these obligations, he had cash of US $ 3.80 billion as well as receivables valued at US $ 4.95 billion due within 12 months. Its liabilities therefore total $ 8.84 billion more than the combination of its cash and short-term receivables.
Corteva has a very large market capitalization of US $ 36.4 billion, so she could most likely raise cash to improve her balance sheet, should the need arise. But it is clear that we absolutely need to take a close look at whether it can manage its debt without dilution. Despite her notable liabilities, Corteva has a clean cash flow, so it’s fair to say that she doesn’t have heavy debt!
And we also warmly note that Corteva increased her EBIT by 15% last year, which makes her debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, more than anything, that will determine Corteva’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the tax authorities love accounting profits, lenders only accept cash. While Corteva has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. Over the past three years, Corteva has reported free cash flow of 13% of its EBIT, which is really pretty low. For us, the cash conversion that arouses a bit of paranoia is the ability to extinguish debt.
While Corteva’s balance sheet isn’t particularly strong, due to total liabilities, it’s clearly positive that she has a net cash position of US $ 2.70 billion. And we liked the appearance of last year’s 15% year-on-year EBIT growth. So we have no problem with Corteva’s use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you must be aware of the 1 warning sign we spotted with Corteva.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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