Yahoo Finance Caesarstone (NASDAQ:CSTE) Has A Somewhat Strained Balance Sheet
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Caesarstone Ltd. (NASDAQ:CSTE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Caesarstone
What Is Caesarstone's Debt?
The image below, which you can click on for greater detail, shows that at June 2022 Caesarstone had debt of US$24.3m, up from US$22.1m in one year. But it also has US$59.9m in cash to offset that, meaning it has US$35.6m net cash.
How Strong Is Caesarstone's Balance Sheet?
We can see from the most recent balance sheet that Caesarstone had liabilities of US$190.6m falling due within a year, and liabilities of US$167.0m due beyond that. Offsetting this, it had US$59.9m in cash and US$133.0m in receivables that were due within 12 months. So its liabilities total US$164.7m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Caesarstone has a market capitalization of US$341.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Caesarstone boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Caesarstone if management cannot prevent a repeat of the 47% cut to EBIT over the last year. 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 Caesarstone'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 Caesarstone 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, Caesarstone's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
Although Caesarstone's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$35.6m. So although we see some areas for improvement, we're not too worried about Caesarstone's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Caesarstone that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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