These 4 metrics indicate that Citrix Systems (NASDAQ: CTXS) is using debt intensively
Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Citrix Systems, Inc. (NASDAQ: CTXS) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.
See our latest analysis for Citrix systems
What is Citrix Systems’ net debt?
As you can see below, at the end of March 2021, Citrix Systems was in debt of $ 3.42 billion, up from $ 1.73 billion a year ago. Click on the image for more details. However, because it has a cash reserve of US $ 498.2 million, its net debt is less, at around US $ 2.93 billion.
How healthy is Citrix Systems’ balance sheet?
We can see from the most recent balance sheet that Citrix Systems had liabilities of US $ 1.99 billion due within one year and liabilities of US $ 4.37 billion due beyond. In compensation for these obligations, it had cash of US $ 498.2 million as well as receivables valued at US $ 607.6 million due within 12 months. Its liabilities therefore total $ 5.26 billion more than the combination of its cash and short-term receivables.
This deficit is not that big as Citrix Systems is worth US $ 14.2 billion and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With a net debt to EBITDA of 4.6, Citrix Systems has a fairly significant amount of debt. On the positive side, its EBIT was 7.2 times its interest expense and its net debt to EBITDA was quite high, at 4.6. Unfortunately, Citrix Systems’ EBIT has fallen 19% over the past four quarters. If this type of decline is not stopped, managing your debt will be more difficult than selling broccoli ice cream at a higher price. 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 Citrix Systems can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, Citrix Systems has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Citrix Systems’ EBIT growth rate and net debt to EBITDA certainly weighs on this, in our view. But its conversion from EBIT to free cash flow tells a very different story and suggests some resilience. Looking at all the angles mentioned above, it seems to us that Citrix Systems is a somewhat risky investment because of its debt. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Citrix Systems, and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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