Yahoo Finance These 4 Measures Indicate That C.H. Robinson Worldwide (NASDAQ:CHRW) Is Using Debt Safely
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for C.H. Robinson Worldwide
What Is C.H. Robinson Worldwide's Net Debt?
The image below, which you can click on for greater detail, shows that C.H. Robinson Worldwide had debt of US$1.25b at the end of June 2019, a reduction from US$1.41b over a year. However, it also had US$355.3m in cash, and so its net debt is US$898.5m.
How Strong Is C.H. Robinson Worldwide's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that C.H. Robinson Worldwide had liabilities of US$1.50b due within 12 months and liabilities of US$1.53b due beyond that. Offsetting this, it had US$355.3m in cash and US$2.28b in receivables that were due within 12 months. So its liabilities total US$390.2m more than the combination of its cash and short-term receivables.
Given C.H. Robinson Worldwide has a humongous market capitalization of US$11.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
C.H. Robinson Worldwide has a low net debt to EBITDA ratio of only 0.87. And its EBIT easily covers its interest expense, being 20.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that C.H. Robinson Worldwide grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if C.H. Robinson Worldwide can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, C.H. Robinson Worldwide recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Our View
The good news is that C.H. Robinson Worldwide's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, C.H. Robinson Worldwide seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. Another factor that would give us confidence in C.H. Robinson Worldwide would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
