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. 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. We note that Rogers Corporation (NYSE:ROG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
What Is Rogers's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Rogers had debt of US$132.0m, up from US$233 in one year. But on the other hand it also has US$140.7m in cash, leading to a US$8.74m net cash position.
A Look At Rogers's Liabilities
We can see from the most recent balance sheet that Rogers had liabilities of US$105.2m falling due within a year, and liabilities of US$229.9m due beyond that. Offsetting these obligations, it had cash of US$140.7m as well as receivables valued at US$166.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$27.6m.
Having regard to Rogers's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.43b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Rogers also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Rogers grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Rogers can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Rogers 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. In the last three years, Rogers's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Rogers has US$8.74m in net cash. And it also grew its EBIT by 12% over the last year. So we don't think Rogers's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Rogers insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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