In the realm of investing, a quote from a knowledgeable figure resonates: ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ This leads us to deliberate on the impact of debt on a company’s risks. Carpenter Technology Corporation (NYSE: CRS) carries debt, prompting scrutiny from its shareholders.
Debt becomes a concern for a company when it struggles to meet its financial obligations, either through free cash flow or by securing capital at a reasonable cost. In dire circumstances, creditors can take control of the business. Although this is uncommon, companies in debt may find themselves diluting shareholders as creditors compel them to secure capital at a low rate. However, debt can also be fundamental for businesses, particularly those with significant capital requirements.
In March 2024, Carpenter Technology held a debt of US$693.9m, down from US$801.3m the previous year. Conversely, it held US$53.5m in cash, resulting in a net debt of approximately US$640.4m. A glance at its liabilities from the latest balance sheet reveals US$453.4m due within a year, and US$1.22b due beyond that. Its total liabilities exceeded the total of its cash and short-term receivables by US$1.10b. Given that the publicly traded Carpenter Technology shares are valued at US$5.50b, it appears unlikely that this level of liabilities poses a major threat. Nevertheless, it is important to remain vigilant about its balance sheet robustness as it may evolve over time.
The company’s earnings are a crucial consideration in evaluating its debt levels. Carpenter Technology’s net debt stands at 1.6 times EBITDA, and its EBIT is only 5.4 times the interest expense. While this is not overly concerning, it does indicate that interest payments may be somewhat burdensome. Additionally, the company has generated free cash flow equivalent to 12% of its EBIT over the past two years, which is less than inspiring. This lackluster cash conversion undermines its ability to manage and pay off debt.
To conclude, while Carpenter Technology’s potential for EBIT growth seems promising, its debt remains a source of concern due to its cash flow conversion. All factors considered, the company appears well-positioned to handle its debt levels, but it remains a substantial burden that shareholders should monitor closely. It is also important to recognize that not all investment risks are evident on the balance sheet. For those apprehensive about Carpenter Technology’s debt, focusing on companies free from net debt may be a more prudent approach.
Assessing Carpenter Technology’s valuation to determine whether it may be over or undervalued is a multifaceted task. A comprehensive analysis should encompass fair value estimates, risks, dividends, insider transactions, and financial health. For any feedback on this article or concerns about its content, please feel free to contact us directly or email the editorial team at simplywallst.com.
It is imperative to note that this article does not constitute financial advice. While it is based on historical data and analyst forecasts using an impartial methodology, it does not serve as a recommendation to buy or sell any stock, nor does it account for your objectives or financial situation. Ultimately, the analysis is primarily driven by fundamental data and does not incorporate the latest price-sensitive company announcements or qualitative material. Simply Wall St holds no position in any stocks mentioned.
In conclusion, Carpenter Technology is engaged in the manufacturing, fabrication, and distribution of specialty metals, and exhibits reasonable growth potential with an adequate balance sheet. Nevertheless, its debt remains a significant factor for potential investors to consider as they assess the company’s prospects.