CTS (NYSE:CTS) Could Easily Take On More Debt

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.' 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. We note that CTS Corporation (NYSE:CTS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CTS

How Much Debt Does CTS Carry?

As you can see below, CTS had US$50.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$126.2m in cash to offset that, meaning it has US$76.2m net cash.

A Look At CTS' Liabilities

Zooming in on the latest balance sheet data, we can see that CTS had liabilities of US$115.0m due within 12 months and liabilities of US$89.5m due beyond that. On the other hand, it had cash of US$126.2m and US$95.1m worth of receivables due within a year. So it can boast US$16.7m more liquid assets than total liabilities.

Having regard to CTS' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.13b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, CTS boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CTS has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CTS's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. CTS 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. Over the last three years, CTS recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CTS has net cash of US$76.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$68m. So is CTS's debt a risk? It doesn't seem so to us. Even though CTS lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.