Carter's (NYSE:CRI) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Carter's, Inc. (NYSE:CRI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Carter's

What Is Carter's's Debt?

The image below, which you can click on for greater detail, shows that Carter's had debt of US$990.4m at the end of July 2021, a reduction from US$1.23b over a year. However, it does have US$1.12b in cash offsetting this, leading to net cash of US$130.5m.

A Look At Carter's' Liabilities

The latest balance sheet data shows that Carter's had liabilities of US$628.3m due within a year, and liabilities of US$1.59b falling due after that. Offsetting these obligations, it had cash of US$1.12b as well as receivables valued at US$164.0m due within 12 months. So its liabilities total US$933.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Carter's has a market capitalization of US$4.65b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Carter's also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Carter's has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. 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 Carter's 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. Carter's 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. During the last three years, Carter's generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Carter's's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$130.5m. And it impressed us with free cash flow of US$365m, being 95% of its EBIT. So is Carter's's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Carter's that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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