Is CTS International Logistics (SHSE:603128) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CTS International Logistics Corporation Limited (SHSE:603128) does carry debt. But is this debt a concern to shareholders?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CTS International Logistics

How Much Debt Does CTS International Logistics Carry?

You can click the graphic below for the historical numbers, but it shows that CTS International Logistics had CN¥486.5m of debt in March 2024, down from CN¥1.15b, one year before. But on the other hand it also has CN¥1.65b in cash, leading to a CN¥1.17b net cash position.

How Strong Is CTS International Logistics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CTS International Logistics had liabilities of CN¥2.89b due within 12 months and liabilities of CN¥339.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥4.26b due within 12 months. So it actually has CN¥2.68b more liquid assets than total liabilities.

This surplus liquidity suggests that CTS International Logistics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that CTS International Logistics has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for CTS International Logistics if management cannot prevent a repeat of the 45% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 CTS International Logistics'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CTS International Logistics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, CTS International Logistics produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case CTS International Logistics has CN¥1.17b in net cash and a decent-looking balance sheet. So we don't have any problem with CTS International Logistics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CTS International Logistics , and understanding them should be part of your investment process.

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.

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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.