Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CTS International Logistics Corporation Limited (SHSE:603128) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does CTS International Logistics Carry?
You can click the graphic below for the historical numbers, but it shows that CTS International Logistics had CN¥486.5m of debt in March 2024, down from CN¥1.15b, one year before. However, it does have CN¥1.65b in cash offsetting this, leading to net cash of CN¥1.17b.
A Look At CTS International Logistics' Liabilities
The latest balance sheet data shows that CTS International Logistics had liabilities of CN¥2.89b due within a year, and liabilities of CN¥339.5m falling due after that. Offsetting this, it had CN¥1.65b in cash and CN¥4.26b in receivables that were due within 12 months. So it can boast CN¥2.68b more liquid assets than total liabilities.
This excess liquidity suggests that CTS International Logistics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CTS International Logistics has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact CTS International Logistics's saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CTS International Logistics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CTS International Logistics 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. Over the most recent three years, CTS International Logistics recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that CTS International Logistics has net cash of CN¥1.17b, as well as more liquid assets than liabilities. So we don't have any problem with CTS International Logistics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CTS International Logistics , and understanding them should be part of your investment process.
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.