Is CTS (NYSE:CTS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CTS Corporation (NYSE:CTS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CTS

What Is CTS's Net Debt?

The image below, which you can click on for greater detail, shows that CTS had debt of US$76.7m at the end of September 2023, a reduction from US$85.5m over a year. But on the other hand it also has US$161.6m in cash, leading to a US$85.0m net cash position.

A Look At CTS' Liabilities

According to the last reported balance sheet, CTS had liabilities of US$103.4m due within 12 months, and liabilities of US$127.9m due beyond 12 months. Offsetting these obligations, it had cash of US$161.6m as well as receivables valued at US$89.6m due within 12 months. So it can boast US$19.9m 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$1.29b 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!

The modesty of its debt load may become crucial for CTS if management cannot prevent a repeat of the 59% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CTS has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, CTS produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case CTS has US$85.0m in net cash and a decent-looking balance sheet. So we don't have any problem with CTS's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CTS's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.