Yahoo Finance Does Carvana Co’s (NYSE:CVNA) Debt Level Pose A Problem?
Investors pursuing a solid, dependable stock investment can often be led to Carvana Co (NYSE:CVNA), a large-cap worth US$10.59b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Carvana’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CVNA here.
Check out our latest analysis for Carvana
How does CVNA’s operating cash flow stack up against its debt?
Over the past year, CVNA has ramped up its debt from US$179.0m to US$430.6m , which comprises of short- and long-term debt. With this increase in debt, CVNA currently has US$199.2m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of CVNA’s operating efficiency ratios such as ROA here.
Does CVNA’s liquid assets cover its short-term commitments?
With current liabilities at US$438.8m, it seems that the business has been able to meet these commitments with a current assets level of US$643.5m, leading to a 1.47x current account ratio. Usually, for Specialty Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CVNA face the risk of succumbing to its debt-load?
Carvana is a highly levered company given that total debt exceeds equity. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. However, since CVNA is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
CVNA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CVNA has been performing in the past. I suggest you continue to research Carvana to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CVNA’s future growth? Take a look at our free research report of analyst consensus for CVNA’s outlook.
Valuation: What is CVNA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CVNA is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
