Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for SS&C Technologies Holdings
How Much Debt Does SS&C Technologies Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 SS&C Technologies Holdings had US$7.24b of debt, an increase on US$6.14b, over one year. However, it also had US$401.9m in cash, and so its net debt is US$6.84b.
How Strong Is SS&C Technologies Holdings’ Balance Sheet?
The latest balance sheet data shows that SS&C Technologies Holdings had liabilities of US$2.20b due within a year, and liabilities of US$8.52b falling due after that. Offsetting these obligations, it had cash of US$401.9m as well as receivables valued at US$797.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$9.51b.
This deficit is considerable relative to its very significant market capitalization of US$14.2b, so it does suggest shareholders should keep an eye on SS&C Technologies Holdings’ use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
SS&C Technologies Holdings has a debt to EBITDA ratio of 3.8 and its EBIT covered its interest expense 4.7 times. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. Sadly, SS&C Technologies Holdings’s EBIT actually dropped 3.0% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SS&C Technologies Holdings’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, SS&C Technologies Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
When it comes to the balance sheet, the standout positive for SS&C Technologies Holdings was the fact that it seems able to convert EBIT to free cash flow confidently. But the other factors we noted above weren’t so encouraging. For example, its net debt to EBITDA makes us a little nervous about its debt. When we consider all the factors mentioned above, we do feel a bit cautious about SS&C Technologies Holdings’s use of debt. While we appreciate debt can enhance returns on equity, we’d suggest that shareholders keep close watch on its debt levels, lest they increase. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – SS&C Technologies Holdings has 1 warning sign we think you should be aware of.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
What are the risks and opportunities for SS&C Technologies Holdings?
SS&C Technologies Holdings, Inc., together with its subsidiaries, provides software products and software-enabled services to financial services and healthcare industries.
Rewards
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Trading at 16.2% below our estimate of its fair value
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Earnings are forecast to grow 13.56% per year
Risks
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Debt is not well covered by operating cash flow
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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.
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