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Is Carter's (NYSE:CRI) Using Too Much Debt?

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Carter's, Inc. (NYSE:CRI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Carter's

How Much Debt Does Carter's Carry?

As you can see below, Carter's had US$990.4m of debt at July 2021, down from US$1.23b a year prior. However, its balance sheet shows it holds US$1.12b in cash, so it actually has US$130.5m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Carter's' Balance Sheet?

We can see from the most recent balance sheet that Carter's had liabilities of US$628.3m falling due within a year, and liabilities of US$1.59b due beyond that. Offsetting this, it had US$1.12b in cash and US$164.0m in receivables that were due within 12 months. So its liabilities total US$933.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Carter's has a market capitalization of US$4.31b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Carter's also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Carter's has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Carter's'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, a company can only pay off debt with cold hard cash, not accounting profits. While Carter's 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, Carter's recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Carter's does have more liabilities than liquid assets, it also has net cash of US$130.5m. And it impressed us with free cash flow of US$365m, being 95% of its EBIT. So is Carter's's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Carter's that you should be aware of before investing here.

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.

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.

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