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

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 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 Rogers Corporation (NYSE:ROG) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rogers

How Much Debt Does Rogers Carry?

As you can see below, Rogers had US$80.0m of debt at September 2023, down from US$290.0m a year prior. However, it does have US$126.5m in cash offsetting this, leading to net cash of US$46.5m.

How Strong Is Rogers' Balance Sheet?

The latest balance sheet data shows that Rogers had liabilities of US$116.1m due within a year, and liabilities of US$194.1m falling due after that. Offsetting this, it had US$126.5m in cash and US$232.2m in receivables that were due within 12 months. So it can boast US$48.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Rogers could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rogers boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Rogers grew its EBIT by 6.5% in the last year, making that debt load look even more manageable. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Rogers recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Rogers has US$46.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.5% over the last year. So we don't have any problem with Rogers's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Rogers , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.