Stock Analysis

Is Carlisle Companies (NYSE:CSL) Using Too Much Debt?

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NYSE:CSL
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Carlisle Companies Incorporated (NYSE:CSL) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Our analysis indicates that CSL is potentially undervalued!

How Much Debt Does Carlisle Companies Carry?

As you can see below, Carlisle Companies had US$2.93b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$625.4m in cash offsetting this, leading to net debt of about US$2.31b.

debt-equity-history-analysis
NYSE:CSL Debt to Equity History December 4th 2022

A Look At Carlisle Companies' Liabilities

The latest balance sheet data shows that Carlisle Companies had liabilities of US$1.55b due within a year, and liabilities of US$3.14b falling due after that. On the other hand, it had cash of US$625.4m and US$1.17b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.89b.

Carlisle Companies has a very large market capitalization of US$13.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Carlisle Companies's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 14.4 times, makes us even more comfortable. Even more impressive was the fact that Carlisle Companies grew its EBIT by 139% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Carlisle Companies 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. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Carlisle Companies recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Carlisle Companies's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Looking at the bigger picture, we think Carlisle Companies's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. For example, we've discovered 1 warning sign for Carlisle Companies that you should be aware of before investing here.

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.

What are the risks and opportunities for Carlisle Companies?

Carlisle Companies Incorporated operates as a diversified manufacturer of engineered products in the United States, Europe, Asia, Canada, Mexico, the Middle East, Africa, and internationally.

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Rewards

  • Trading at 30.5% below our estimate of its fair value

  • Earnings are forecast to grow 6.77% per year

  • Earnings grew by 159.1% over the past year

Risks

  • Has a high level of debt

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