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Warren Buffett famously said, “Volatility is not synonymous with risk.” It’s only natural to consider a company’s balance sheet when you consider how risky it is, since debt is often involved when a business collapses.Like many other companies Equifax Co., Ltd. (NYSE:EFX) uses debt. But the more important question is how much risk that debt creates.
Why does debt pose a risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it is at their mercy. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more frequent (but still costly) occurrence is when a company must issue stock at a bargain price, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. When we think about a company’s use of debt, we first think of cash and debt together.
See our latest analysis for Equifax.
How much debt does Equifax have?
As you can see below, Equifax had debt of US$5.71b at December 2023, which is about the same as a year ago. Click on the graph to see details. However, he also had US$216.8m in cash, so his net debt is US$5.49b.
How healthy is Equifax’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Equifax had liabilities of US$2.03b due within 12 months, and liabilities of US$5.57b due beyond that. On the other hand, it had cash of US$216.8m and receivables worth US$917.2m that were due within a year. So its liabilities total US$6.47b more than its cash and short-term receivables, combined.
Equifax has a large market capitalization of US$31.8 billion, so it’s very likely that it will raise cash to shore up its balance sheet if needed. However, it is clear that we need to take a close look at whether debt can be managed without dilution.
To determine how much debt a company has relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA), and its earnings before interest, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (interest cover ratio).
Equifax’s debt is 3.5 times its EBITDA, and its EBIT covers its interest expense 4.1 times. Taken together, this means that while we don’t want higher debt levels, we think the current leverage can be managed. Investors should also be bothered by the fact that Equifax saw its EBIT fall by his 14% in the last twelve months. At this rate, dealing with debt burdens will be like delivering hot coffee with a pogo stick. The balance sheet is clearly the area to focus on when analyzing debt. But more than anything else, future earnings will determine whether Equifax can maintain a healthy balance sheet going forward. So if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.
Finally, companies need free cash flow to pay down debt. Accounting profits alone are not enough. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Looking at the most recent three years, Equifax’s free cash flow was 48% of his EBIT, which was lower than expected. It’s not great when it comes to paying off debt.
our view
Although Equifax’s EBIT growth rate was materially negative in this analysis, other factors we considered significantly improved this growth rate. But on the bright side, its ability to handle its total debt isn’t terrible at all. Taking the above factors together, we believe that Equifax’s debt poses some risk to its business. So while that leverage does increase return on equity, we don’t really want it to increase from here. There’s no question that we learn most about debt from the balance sheet. Ultimately, however, any company can contain risks that exist outside the balance sheet. We’ve identified 1 warning sign With Equifax, understanding them should be part of your investment process.
If you’re more interested in fast-growing companies with rock-solid balance sheets, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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