These 4 Measures Indicate That Caesarstone (NASDAQ:CSTE) Is Using Debt Extensively

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.' 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. As with many other companies Caesarstone Ltd. (NASDAQ:CSTE) makes use of debt. But the more important question is: how much risk is that debt creating?

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

See our latest analysis for Caesarstone

What Is Caesarstone's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Caesarstone had debt of US$24.3m, up from US$22.1m in one year. But on the other hand it also has US$59.9m in cash, leading to a US$35.6m net cash position.

How Strong Is Caesarstone's Balance Sheet?

According to the last reported balance sheet, Caesarstone had liabilities of US$190.6m due within 12 months, and liabilities of US$167.0m due beyond 12 months. Offsetting these obligations, it had cash of US$59.9m as well as receivables valued at US$133.0m due within 12 months. So it has liabilities totalling US$164.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Caesarstone has a market capitalization of US$347.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 47% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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'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. 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's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Caesarstone does have more liabilities than liquid assets, it also has net cash of US$35.6m. So while Caesarstone does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Caesarstone , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.