Does Cerner (NASDAQ: CERN) have a healthy track record?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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, Cerner Corporation (NASDAQ: CERN) is in debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for Cerner
What is Cerner’s debt?
You can click on the graph below for the historical figures, but it shows that as of June 2021, Cerner had a debt of US $ 1.86 billion, an increase from US $ 1.38 billion, over a year. However, it has $ 884.9 million in cash offsetting this, which leads to net debt of around $ 979.3 million.
How strong is Cerner’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Cerner had a liability of US $ 1.54 billion owed within 12 months and a liability of US $ 2.15 billion owed beyond that. In return, he had $ 884.9 million in cash and $ 1.24 billion in receivables due within 12 months. It therefore has liabilities totaling US $ 1.57 billion more than its cash and short-term receivables combined.
Considering that Cerner has a whopping market cap of US $ 23.3 billion, it’s hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Cerner’s net debt is only 0.71 times its EBITDA. And its EBIT covers its interest costs 5,000 times. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Another good sign is that Cerner was able to increase their EBIT by 30% in twelve months, making it easier to pay off debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Cerner can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Cerner has recorded free cash flow of 88% of its EBIT, which is higher than what we normally expect. This puts him in a very strong position to pay off the debt.
Our point of view
Cerner’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! It’s also worth noting that Cerner belongs to the healthcare industry, which is often seen as quite defensive. We believe that Cerner is no more indebted to its lenders than the birds are to the bird watchers. For investment nerds like us, his record is almost charming. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Identifying and understanding them should be part of your investment process.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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 the mentioned stocks.
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