CDW (NASDAQ:CDW) appears to be using its debt quite wisely

Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it seems that smart people know that debt – which usually accompanies bankruptcies – is a very important factor when assessing a company’s risk. What is important is CDW Corporation (NASDAQ:CDW) carries debt. But the more important question is: How much risk does this debt pose?

When is debt dangerous?

Debt helps a business until the business has difficulty paying it off, whether with new capital or free cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, a more common (but still painful) scenario involves having to raise new equity capital at a low price, resulting in permanent shareholder dilution. However, as a replacement for dilution, debt can be an extremely good tool for companies that need capital to invest in growth at high returns. When considering how much debt a company has, you first need to consider its cash flow and debt together.

Check out our latest analysis for CDW

How much debt does CDW have?

The chart below, which you can click on for more details, shows that CDW had $6.39 billion in debt as of September 2024; about the same as the year before. However, since the company has a cash reserve of $1.16 billion, its net debt is less, at about $5.23 billion.

A look at CDW’s liabilities

The most recent balance sheet showed that CDW had liabilities of US$5.46b due within a year, and liabilities of US$6.57b due beyond that. Offsetting these obligations, it had cash of US$1.16b as well as receivables valued at US$5.51b due within 12 months. So its liabilities total US$5.36b more than the combination of its cash and short-term receivables.

This deficit isn’t that bad since CDW is valued at a massive $23.4 billion and therefore could probably raise enough capital to shore up its balance sheet if needed. But we definitely want to keep an eye out for signs that the company’s debt poses too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and tax (EBIT) cover interest expense (or interest cover, for short). . We take into account both the absolute amount of the debt and the interest paid on it.

CDW has a net debt to EBITDA ratio of 2.6, suggesting that the company uses significant leverage to boost returns. On the positive side, EBIT was 8.2 times interest expense and net debt to EBITDA was quite high at 2.6 times. Unfortunately, CDW suffered a 3.4% decline in EBIT over the last twelve months. If this earnings trend continues, the company’s debt load will be as big as the heart of a polar bear watching its only cub. When analyzing debt levels, the balance sheet is the obvious place to start. Ultimately, however, the company’s future profitability will determine whether CDW can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

After all, a company needs free cash flow to pay off debt; Book profits are simply not enough. So we definitely need to check whether that EBIT leads to corresponding free cash flow. Over the last three years, CDW recorded free cash flow worth 70% of its EBIT, which is about normal considering that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay down debt if necessary.

Our view

When it comes to the balance sheet, the most outstanding positive for CDW was the fact that the company appears to be able to convert EBIT into free cash flow with confidence. However, our other observations were not so encouraging. For example, it looks like it’s having to struggle a bit to grow its EBIT. Given this range of data, we believe CDW is in a good position to manage its debt. However, the burden is so great that we would recommend that every shareholder keep a close eye on it. The balance sheet is clearly the area you should focus on when analyzing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we identified 1 warning sign for CDW what you should be aware of.

If you’re the kind of investor who prefers buying stocks without the burden of debt, then don’t hesitate to explore our exclusive list of net cash growth stocks today.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.