These 4 Measures Indicate That CTS (NYSE:CTS) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that CTS Corporation (NYSE:CTS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 CTS had US$65.5m of debt in June 2024, down from US$77.7m, one year before. But on the other hand it also has US$162.4m in cash, leading to a US$97.0m net cash position.

How Strong Is CTS' Balance Sheet?

The latest balance sheet data shows that CTS had liabilities of US$92.4m due within a year, and liabilities of US$110.4m falling due after that. Offsetting these obligations, it had cash of US$162.4m as well as receivables valued at US$85.4m due within 12 months. So it can boast US$44.9m more liquid assets than total liabilities.

This short term liquidity is a sign that CTS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CTS has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact CTS's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept 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 recorded free cash flow worth a fulsome 90% 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 it is always sensible to investigate a company's debt, in this case CTS has US$97.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$77m, being 90% of its EBIT. So we don't have any problem with CTS's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that CTS insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.