U.S. Markets closed

What does Carpenter Technology Corporation's (NYSE:CRS) Balance Sheet Tell Us About Its Future?

Simply Wall St

Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!

Stocks with market capitalization between $2B and $10B, such as Carpenter Technology Corporation (NYSE:CRS) with a size of US$2.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine CRS’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CRS here.

View our latest analysis for Carpenter Technology

Does CRS Produce Much Cash Relative To Its Debt?

CRS's debt levels surged from US$614m to US$650m over the last 12 months – this includes long-term debt. With this increase in debt, CRS's cash and short-term investments stands at US$29m to keep the business going. On top of this, CRS has produced US$239m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 37%, indicating that CRS’s debt is appropriately covered by operating cash.

Does CRS’s liquid assets cover its short-term commitments?

With current liabilities at US$498m, the company has been able to meet these obligations given the level of current assets of US$1.3b, with a current ratio of 2.53x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:CRS Historical Debt, April 9th 2019

Is CRS’s debt level acceptable?

With debt reaching 43% of equity, CRS may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CRS's case, the ratio of 7.72x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

CRS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CRS's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CRS has been performing in the past. You should continue to research Carpenter Technology to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CRS’s future growth? Take a look at our free research report of analyst consensus for CRS’s outlook.
  2. Valuation: What is CRS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CRS is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.