Is Caesarstone (NASDAQ:CSTE) A Risky Investment?

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.' 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 Caesarstone Ltd. (NASDAQ:CSTE) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Caesarstone

What Is Caesarstone's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Caesarstone had US$34.8m of debt, an increase on US$21.8m, over one year. But on the other hand it also has US$65.2m in cash, leading to a US$30.4m net cash position.

How Healthy Is Caesarstone's Balance Sheet?

The latest balance sheet data shows that Caesarstone had liabilities of US$191.8m due within a year, and liabilities of US$160.6m falling due after that. On the other hand, it had cash of US$65.2m and US$122.7m worth of receivables due within a year. So its liabilities total US$164.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$221.3m, so it does suggest shareholders should keep an eye on Caesarstone's use of debt. 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.

In fact Caesarstone's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Caesarstone can strengthen its balance sheet over time. 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. Caesarstone 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. In the last three years, Caesarstone created free cash flow amounting to 8.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While Caesarstone does have more liabilities than liquid assets, it also has net cash of US$30.4m. Despite its cash we think that Caesarstone seems to struggle to grow its EBIT, so we are wary of the stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Caesarstone .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.