Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that CARBO Ceramics Inc. (NYSE:CRR) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for CARBO Ceramics
How Much Debt Does CARBO Ceramics Carry?
You can click the graphic below for the historical numbers, but it shows that CARBO Ceramics had US$62.0m of debt in June 2019, down from US$88.1m, one year before. However, it does have US$40.8m in cash offsetting this, leading to net debt of about US$21.2m.
How Healthy Is CARBO Ceramics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CARBO Ceramics had liabilities of US$41.0m due within 12 months and liabilities of US$117.2m due beyond that. On the other hand, it had cash of US$40.8m and US$26.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$91.2m.
Given this deficit is actually higher than the company's market capitalization of US$78.7m, we think shareholders really should watch CARBO Ceramics's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CARBO Ceramics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.