Stock Analysis

Rogers (NYSE:ROG) Seems To Use Debt Quite Sensibly

NYSE:ROG
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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Rogers Corporation (NYSE:ROG) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Rogers

What Is Rogers's Net Debt?

As you can see below, Rogers had US$60.0m of debt at September 2020, down from US$132.0m a year prior. But on the other hand it also has US$186.1m in cash, leading to a US$126.1m net cash position.

debt-equity-history-analysis
NYSE:ROG Debt to Equity History December 21st 2020

How Healthy Is Rogers's Balance Sheet?

The latest balance sheet data shows that Rogers had liabilities of US$106.4m due within a year, and liabilities of US$178.7m falling due after that. Offsetting this, it had US$186.1m in cash and US$165.0m in receivables that were due within 12 months. So it actually has US$66.1m more liquid assets than total liabilities.

This surplus suggests that Rogers has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Rogers boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Rogers's EBIT was down 84% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Rogers's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rogers 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. During the last three years, Rogers produced sturdy free cash flow equating to 77% 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 Rogers has US$126.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$118m. So we are not troubled with Rogers's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Rogers you should be aware of.

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. 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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