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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Castor Maritime Inc. (NASDAQ:CTRM) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Castor Maritime Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Castor Maritime had US$32.6m of debt, an increase on US$22.0m, over one year. However, its balance sheet shows it holds US$62.3m in cash, so it actually has US$29.7m net cash.
How Healthy Is Castor Maritime's Balance Sheet?
The latest balance sheet data shows that Castor Maritime had liabilities of US$14.3m due within a year, and liabilities of US$23.7m falling due after that. On the other hand, it had cash of US$62.3m and US$2.89m worth of receivables due within a year. So it actually has US$27.2m more liquid assets than total liabilities.
This surplus suggests that Castor Maritime has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Castor Maritime has more cash than debt is arguably a good indication that it can manage its debt safely.
Importantly, Castor Maritime's EBIT fell a jaw-dropping 25% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Castor Maritime will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Castor Maritime 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, Castor Maritime saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Castor Maritime has US$29.7m in net cash and a decent-looking balance sheet. Despite its cash we think that Castor Maritime seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Castor Maritime (of which 3 are potentially serious!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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