These 4 metrics indicate that Investnet (NYSE: ENV) is using debt reasonably well

Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, Envestnet, Inc. (NYSE: ENV) is in debt. But should shareholders be concerned about its use of debt?

When is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

What is Investnet’s debt?

You can click on the graph below for historical figures, but it shows that as of September 2021, Envestnet had a debt of US $ 847.6 million, an increase from US $ 749.9 million, over a year. On the other hand, it has $ 393.8 million in cash, resulting in net debt of around $ 453.8 million.

NYSE Debt to Equity History: ENV January 1, 2022

How healthy is Investnet’s balance sheet?

The latest balance sheet data shows that Investnet had liabilities of US $ 269.4 million due within one year, and liabilities of US $ 1.00 billion due after that. On the other hand, he had $ 393.8 million in cash and $ 123.2 million in receivables within a year. Its liabilities therefore total US $ 753.3 million more than the combination of its cash and short-term receivables.

Considering that the listed Envestnet shares are worth a total of US $ 4.34 billion, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.

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.

Investnet’s debt is 3.0 times its EBITDA and its EBIT covers its interest expense 2.9 times. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. Looking on the bright side, Envestnet increased its EBIT by a silky 46% last year. Like a mother’s loving embrace of a newborn, this type of growth builds resilience, putting the business in a stronger position to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Envestnet can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Fortunately for all shareholders, Envestnet has actually generated more free cash flow than EBIT over the past three years. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.

Our point of view

The good news is that Investnet’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But you have to admit that its hedging interest has the opposite effect. When we consider the above range of factors, it seems that Investnet is quite reasonable with its use of debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 2 warning signs we spotted with Envestnet (including 1 which is significant) .

Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

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