Howard Marks put it nicely when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and every practical investor I know is concerned.” worries.’ It is only natural to consider a company’s balance sheet when considering how risky it is, as there are often debts when a company collapses. We can see that Coca-Cola Consolidated, Inc. (NASDAQ:COKE) does use debt in its business. But the real question is whether this debt makes the business risky.
Why does debt involve risks?
In general, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or using its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is a company having to issue shares at spot prices, permanently diluting shareholders, just to bolster its balance sheet. However, by replacing dilution, debt can be an extremely good tool for companies that need capital to invest in high-yield growth. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
How Much Debt Does Coca-Cola Consolidated Carry?
As you can see below, Coca-Cola Consolidated had US$909.3 million in debt in April 2021, down from US$1.08ba year earlier. However, it also had US$51.8 million in cash, and so its net debt is US$857.5 million.
A Look at Coca-Cola Consolidated’s Commitments
If we zoom in on the most recent balance sheet data, we can see that Coca-Cola Consolidated had liabilities of $683.9 million within 12 months and $2.04 billion thereafter. On the other hand, it had $51.8 million in cash and $534.7 million in receivables due within a year. So his liabilities total US$2.13 billion more than the combination of his cash and receivables.
This shortfall isn’t so bad, as Coca-Cola Consolidated is worth $4.16 billion and so could probably raise enough capital to bolster its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for evidence that his guilt carries too much risk.
To upgrade a company’s debt relative to revenue, we calculate net debt divided by revenue before interest, taxes, depreciation, and amortization (EBITDA) and revenue before interest and tax (EBIT) divided by interest expense (are interest coverage). So we consider debt in relation to earnings, both with and without depreciation and amortization costs.
We’d say Coca-Cola Consolidated’s subdued net debt-to-EBITDA ratio (1.6) indicates caution when it comes to debt. And its strong interest coverage of 10.4 times makes us even more comfortable. In addition, Coca-Cola Consolidated’s EBIT grew 95% over the past 12 months, and that growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it’s Coca-Cola Consolidated’s revenues that will affect its balance sheet going forward. So if you want to know more about the earnings, it might be worth checking out this graph of the long term profit trend.
Finally, while the tax man loves accounting profits, lenders only accept cold hard cash. So the logical step is to look at the portion of that EBIT that is matched by actual free cash flow. Over the past three years, Coca-Cola Consolidated posted free cash flow worth a staggering 91% of its EBIT, which is stronger than we would normally expect. That positions it well to pay off debt when desirable.
Coca-Cola Consolidated’s conversion from EBIT to free cash flow suggests it can handle its debt just as easily as Cristiano Ronaldo could score a goal against an under-14 goalkeeper. a little undermined. Zooming out, Coca-Cola Consolidated seems fairly reasonable in dealing with debt; and that gets the wink from us. While debt carries risks, when used wisely, it can also provide a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside within the balance sheet – far from it. To this end, you must be aware of the 2 warning signs we spotted with Coca-Cola Consolidated .
If you are interested in investing in companies that can make profits without debt, check this out free list of growing companies with net cash on the balance sheet.
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