Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Catalent, Inc. (NYSE:CTLT) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Catalent's Debt?
As you can see below, Catalent had US$4.59b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$162.0m in cash, and so its net debt is US$4.43b.
How Healthy Is Catalent's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Catalent had liabilities of US$1.01b due within 12 months and liabilities of US$5.26b due beyond that. Offsetting these obligations, it had cash of US$162.0m as well as receivables valued at US$1.35b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.76b.
Catalent has a very large market capitalization of US$10.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Catalent's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Catalent had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to US$4.1b. We would much prefer see growth.
Caveat Emptor
Importantly, Catalent had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$118m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$123m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Catalent (1 shouldn't be ignored!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.