Here’s why Civitas Resources (NYSE:CIVI) can manage its debt responsibly

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Civitas Resources, Inc. (NYSE: CIVI) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

What is Civitas Resources debt?

You can click on the graph below for historical numbers, but it shows that in June 2022, Civitas Resources had debt of $392.5 million, up from $199.0 million, on a year. But he also has $439.3 million in cash to offset that, which means he has $46.7 million in net cash.

NYSE: CIVI Debt to Equity History September 25, 2022

How strong is Civitas Resources’ balance sheet?

According to the last published balance sheet, Civitas Resources had liabilities of $1.47 billion maturing within 12 months and liabilities of $947.9 million maturing beyond 12 months. As compensation for these obligations, it had cash of US$439.3 million and receivables valued at US$527.9 million due within 12 months. Thus, its liabilities total $1.45 billion more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not that bad since Civitas Resources has a market capitalization of US$4.63 billion, so it could likely bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky. While it has liabilities worth noting, Civitas Resources also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Even better, Civitas Resources increased its EBIT by 6,653% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Civitas Resources’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Civitas Resources has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past three years, Civitas Resources has produced strong free cash flow equivalent to 58% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

Although Civitas Resources has more liabilities than liquid assets, it also has a net cash position of $46.7 million. And it has impressed us with its EBIT growth of 6,653% over the past year. We therefore do not believe Civitas Resources’ use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Be aware that Civitas Resources displays 2 warning signs in our investment analysis and 1 of them is a little unpleasant…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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