Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that CTS Corporation (NYSE:CTS) does use debt in its business. But is this debt a concern to shareholders?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is CTS's Net Debt?
As you can see below, CTS had US$51.4m of debt at September 2021, down from US$108.8m a year prior. But on the other hand it also has US$128.5m in cash, leading to a US$77.1m net cash position.
How Strong Is CTS' Balance Sheet?
We can see from the most recent balance sheet that CTS had liabilities of US$105.1m falling due within a year, and liabilities of US$89.5m due beyond that. Offsetting this, it had US$128.5m in cash and US$78.2m in receivables that were due within 12 months. So it actually has US$12.1m more liquid assets than total liabilities.
Having regard to CTS' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.03b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that CTS has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CTS can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year CTS wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$503m. With any luck the company will be able to grow its way to profitability.
So How Risky Is CTS?
While CTS lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$75m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 21% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like CTS I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.