Is CTS (NYSE:CTS) Using Too Much Debt?

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?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CTS

How Much Debt Does CTS Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 CTS had US$80.9m of debt, an increase on US$50.0m, over one year. However, it does have US$145.0m in cash offsetting this, leading to net cash of US$64.1m.

How Healthy Is CTS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CTS had liabilities of US$105.8m due within 12 months and liabilities of US$127.1m due beyond that. Offsetting these obligations, it had cash of US$145.0m as well as receivables valued at US$97.7m due within 12 months. So it actually has US$9.82m 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 it's very unlikely that the US$1.42b 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!

Also good is that CTS grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case CTS has US$64.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$98m, being 102% of its EBIT. So is CTS's debt a risk? It doesn't seem so to us. We'd be very excited to see if CTS insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.