Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CTS International Logistics Corporation Limited (SHSE:603128) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is CTS International Logistics's Net Debt?

As you can see below, CTS International Logistics had CN¥534.7m of debt at June 2024, down from CN¥806.8m a year prior. However, its balance sheet shows it holds CN¥1.73b in cash, so it actually has CN¥1.19b net cash.

How Strong Is CTS International Logistics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CTS International Logistics had liabilities of CN¥3.87b due within 12 months and liabilities of CN¥329.0m due beyond that. Offsetting this, it had CN¥1.73b in cash and CN¥4.95b in receivables that were due within 12 months. So it actually has CN¥2.48b more liquid assets than total liabilities.

This surplus liquidity suggests that CTS International Logistics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

The modesty of its debt load may become crucial for CTS International Logistics if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 CTS International Logistics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case CTS International Logistics has CN¥1.19b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥132m, being 66% of its EBIT. So we are not troubled with CTS International Logistics's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for CTS International Logistics you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.