We Think CTS (NYSE:CTS) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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$77.7m at the end of June 2023, a reduction from US$91.0m over a year. But it also has US$152.5m in cash to offset that, meaning it has US$74.8m net cash.

How Strong Is CTS' Balance Sheet?

According to the last reported balance sheet, CTS had liabilities of US$107.2m due within 12 months, and liabilities of US$127.3m due beyond 12 months. Offsetting this, it had US$152.5m in cash and US$97.5m in receivables that were due within 12 months. So it actually has US$15.5m 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 while it's hard to imagine that the US$1.35b 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.

But the bad news is that CTS has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. 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$74.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$105m, being 101% of its EBIT. So is CTS's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in CTS, you may well want to click here to check an interactive graph of its earnings per share history.

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.