Is Caesarstone (NASDAQ:CSTE) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Caesarstone had US$7.92m of debt in December 2023, down from US$31.2m, one year before. However, its balance sheet shows it holds US$91.1m in cash, so it actually has US$83.2m net cash.

How Strong Is Caesarstone's Balance Sheet?

We can see from the most recent balance sheet that Caesarstone had liabilities of US$121.2m falling due within a year, and liabilities of US$135.8m due beyond that. Offsetting these obligations, it had cash of US$91.1m as well as receivables valued at US$83.3m due within 12 months. So it has liabilities totalling US$82.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Caesarstone is worth US$145.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Caesarstone boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Caesarstone had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$565m. We would much prefer see growth.

So How Risky Is Caesarstone?

Although Caesarstone had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$55m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Caesarstone's profit, revenue, and operating cashflow have changed 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.