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 CTS Corporation (NYSE:CTS) does use debt in its business. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is CTS's Debt?
As you can see below, CTS had US$51.4m of debt at September 2021, down from US$108.8m a year prior. But it also has US$128.5m in cash to offset that, meaning it has US$77.1m net cash.
How Strong Is CTS' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CTS had liabilities of US$105.1m due within 12 months and liabilities of US$89.5m due beyond that. Offsetting these obligations, it had cash of US$128.5m as well as receivables valued at US$78.2m due within 12 months. So it can boast US$12.1m more liquid assets than total liabilities.
This state of affairs indicates that CTS' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.15b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that CTS has more cash than debt is arguably a good indication that it can manage its debt safely. 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 CTS 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.
In the last year CTS wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$503m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is CTS?
Although CTS had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$75m. 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. Keeping in mind its 21% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like CTS I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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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