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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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Core Molding Technologies, Inc. (NYSEMKT:CMT) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Core Molding Technologies Carry?
As you can see below, at the end of June 2019, Core Molding Technologies had US$59.9m of debt, up from US$43.4m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.
A Look At Core Molding Technologies's Liabilities
We can see from the most recent balance sheet that Core Molding Technologies had liabilities of US$40.9m falling due within a year, and liabilities of US$65.0m due beyond that. Offsetting this, it had US$533.0k in cash and US$49.2m in receivables that were due within 12 months. So its liabilities total US$56.2m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of US$46.8m, we think shareholders really should watch Core Molding Technologies's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Core Molding Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Core Molding Technologies reported revenue of US$291m, which is a gain of 39%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Core Molding Technologies still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable US$5.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$14m in negative free cash flow over the last year. That means it's on the risky side of things. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Core Molding Technologies insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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