Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Gartner, Inc. (NYSE:IT) has debt on its balance sheet. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Discover our latest analysis for Gartner
What is Gartner’s debt?
The image below, which you can click on for more details, shows that as of December 2021, Gartner had $2.52 billion in debt, up from $2.09 billion in one year. However, he also had $756.5 million in cash, so his net debt is $1.76 billion.
How strong is Gartner’s balance sheet?
We can see from the most recent balance sheet that Gartner had liabilities of $3.38 billion due in one year, and liabilities of $3.67 billion beyond. On the other hand, it had a cash position of 756.5 million dollars and 1.39 billion dollars in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $4.90 billion.
Gartner has a very large market capitalization of US$23.6 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Gartner’s net debt to EBITDA ratio of around 1.5 suggests only moderate use of debt. And its strong interest coverage of 10.1 times puts us even more at ease. On top of that, Gartner has grown its EBIT by 96% in the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Gartner 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, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore worth checking how much of this EBIT is supported by free cash flow. Fortunately for all shareholders, Gartner has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.
Our point of view
Fortunately, Gartner’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. And the good news does not stop there, since its EBIT growth rate also confirms this impression! Overall, we think Gartner’s use of debt seems entirely reasonable and we’re not concerned about that. After all, reasonable leverage can increase return on equity. 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 outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Gartner (1 of which should not be ignored!) that you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.
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