These 4 Measures Indicate That Verizon Communications (NYSE:VZ) Is Using Debt Extensively (2024)

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Verizon Communications Inc. (NYSE:VZ) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Verizon Communications

What Is Verizon Communications's Debt?

As you can see below, Verizon Communications had US$147.4b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$4.21b in cash, and so its net debt is US$143.2b.

How Strong Is Verizon Communications' Balance Sheet?

The latest balance sheet data shows that Verizon Communications had liabilities of US$55.7b due within a year, and liabilities of US$230.1b falling due after that. Offsetting these obligations, it had cash of US$4.21b as well as receivables valued at US$23.6b due within 12 months. So its liabilities total US$257.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$144.9b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Verizon Communications would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Verizon Communications has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 6.2 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Sadly, Verizon Communications's EBIT actually dropped 4.6% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 Verizon Communications'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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Considering the last three years, Verizon Communications actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

We'd go so far as to say Verizon Communications's level of total liabilities was disappointing. But at least its interest cover is not so bad. We're quite clear that we consider Verizon Communications to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Verizon Communications you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.