Carvana’s financials reveal a relatively healthy balance sheet for NYSE listed company CVNA.

When evaluating the risk associated with investing in a particular stock, it’s essential to consider debt levels. As David Iben succinctly put it, "Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital." This perspective highlights the importance of understanding how much debt a company carries and the potential risks associated with it.

Why Does Debt Bring Risk?

Debt can be both a blessing and a curse for businesses. While it provides necessary funding to support growth, it also increases the risk of financial instability if not managed properly. When a business struggles to repay its debts, lenders may force them to raise capital at a distressed price, leading to permanent dilution of shareholder value.

A Look into Carvana Co.’s Debt

Carvana Co. (NYSE:CVNA) is one company that carries significant debt on its balance sheet. As of September 2024, the company had approximately $5.03 billion in debt, which is roughly the same as the previous year. However, it also had $1.33 billion in cash reserves.

Calculating Net Debt

To get a clearer picture of Carvana’s debt situation, we need to calculate its net debt. This can be done by subtracting the company’s cash reserves from its total debt.

Net Debt = Total Debt - Cash Reserves
= $5.03 billion - $1.33 billion
= $3.70 billion

Evaluating Carvana’s Balance Sheet

According to the latest reported balance sheet, Carvana has liabilities of approximately $1.16 billion due within 12 months and $5.92 billion due beyond 12 months. However, it also has cash reserves of $1.33 billion and $367 million in receivables that are due within 12 months.

Liabilities = Total Debt + Accrued Expenses
= $6.98 billion (Total Debt) + $1.16 billion (Accrued Expenses)
= $8.14 billion

Receivables = Cash Reserves + Receivables Due Within 12 Months
= $1.33 billion (Cash Reserves) + $367 million (Receivables Due Within 12 Months)
= $1.697 billion

The Importance of Debt-to-Equity Ratio

To understand the extent to which debt is affecting Carvana’s financial health, we need to examine its debt-to-equity ratio.

Debt-to-Equity Ratio = Total Debt / Shareholders' Equity
= $5.03 billion (Total Debt) / $42.1 billion (Shareholders' Equity)
= 0.12

Evaluating Interest Cover

Another crucial metric to consider is interest cover, which indicates the company’s ability to pay its interest expenses.

Interest Cover = EBIT / Interest Expenses
= $695 million (EBIT) / $695 million (Interest Expenses)
= 1.0

Our View on Carvana’s Debt Situation

While Carvana’s debt levels are not alarmingly high, we do have some concerns about its interest cover ratio of 1.0 times. This suggests that the company may struggle to pay its interest expenses in the future.

However, the company has performed well in terms of converting EBIT into free cash flow, with a conversion rate of approximately 77%. This is a positive sign, indicating that Carvana can manage its debt effectively.

Recommendation

Based on our analysis, we believe that Carvana’s debt situation is manageable. However, we do recommend keeping a close eye on the company’s balance sheet and monitoring any changes in its debt levels.

Additional Resources

For investors looking for companies with minimal debt, Simply Wall St offers a comprehensive list of such stocks. This list includes companies with a track record of profit growth and no net debt.

If you have any feedback or concerns about this article, please don’t hesitate to get in touch with us directly.