Caesarstone (NASDAQ:CSTE) Seems To Be Using A Lot Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Caesarstone Ltd. (NASDAQ:CSTE) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Caesarstone

How Much Debt Does Caesarstone Carry?

The chart below, which you can click on for greater detail, shows that Caesarstone had US$18.7m in debt in March 2023; about the same as the year before. But on the other hand it also has US$51.7m in cash, leading to a US$33.0m net cash position.

How Strong Is Caesarstone's Balance Sheet?

According to the last reported balance sheet, Caesarstone had liabilities of US$139.1m due within 12 months, and liabilities of US$147.1m due beyond 12 months. On the other hand, it had cash of US$51.7m and US$111.7m worth of receivables due within a year. So it has liabilities totalling US$122.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$182.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Caesarstone also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Caesarstone's EBIT was down 100% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Caesarstone's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Caesarstone has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Caesarstone burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Caesarstone does have more liabilities than liquid assets, it also has net cash of US$33.0m. Unfortunately, though, both its struggle EBIT growth rate and its conversion of EBIT to free cash flow leave us concerned about Caesarstone So even though it has net cash, we do think the business has some risks worth watching. Even though Caesarstone lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.