Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Corsair Gaming, Inc. (NASDAQ:CRSR) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Corsair Gaming's Net Debt?
As you can see below, Corsair Gaming had US$198.2m of debt at December 2023, down from US$238.7m a year prior. On the flip side, it has US$178.3m in cash leading to net debt of about US$19.9m.
A Look At Corsair Gaming's Liabilities
According to the last reported balance sheet, Corsair Gaming had liabilities of US$418.5m due within 12 months, and liabilities of US$245.0m due beyond 12 months. Offsetting this, it had US$178.3m in cash and US$253.3m in receivables that were due within 12 months. So its liabilities total US$231.9m more than the combination of its cash and short-term receivables.
Of course, Corsair Gaming has a market capitalization of US$1.41b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Corsair Gaming has a very light debt load indeed.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Corsair Gaming has a very low debt to EBITDA ratio of 0.33 so it is strange to see weak interest coverage, with last year's EBIT being only 0.92 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. We also note that Corsair Gaming improved its EBIT from a last year's loss to a positive US$9.7m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Corsair Gaming 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Corsair Gaming actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
Happily, Corsair Gaming's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But we must concede we find its interest cover has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Corsair Gaming can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Corsair Gaming has 1 warning sign we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.