Is Citi Trends (NASDAQ: CTRN) Using Too Much Debt?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Mostly, Citi Trends, Inc. (NASDAQ: CTRN) is in debt. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for Citi Trends

What is Citi Trends’ debt?

As you can see below, at the end of August 2020, Citi Trends had $ 41.6 million in debt, up from none a year ago. Click on the image for more details. But on the other hand, it also has $ 146.7 million in cash, which leads to a net cash position of $ 105.1 million.

debt-equity-historical-analysis

debt-equity-historical-analysis

Is Citi Trends’ track record healthy?

The latest balance sheet data shows that Citi Trends had liabilities of US $ 154.1 million due within one year, and liabilities of US $ 183.2 million due thereafter. In return, he had $ 146.7 million in cash and $ 1.06 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 189.6 million.

This shortfall is substantial compared to its market capitalization of US $ 306.0 million, so he suggests shareholders keep an eye on Citi Trends’ use of debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. While it has some liabilities to note, Citi Trends also has more cash than debt, so we’re pretty confident it can handle its debt safely.

Modest indebtedness may become critical to Citi Trends if management cannot prevent a repeat of the 38% reduction in EBIT over the past year. When a business sees its profits accumulate, it can sometimes see its relationship with its lenders deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Citi Trends will need revenue to pay off this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. Citi Trends may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Fortunately for all shareholders, Citi Trends has actually generated more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

In summary

While Citi Trends’ balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of US $ 105.1 million. The icing on the cake is that he converted 190% of that EBIT into free cash flow, bringing in US $ 56 million. So we have no problem with Citi Trends’ use of debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Consider, for example, the ever-present specter of investment risk. We have identified 4 warning signs with Citi Trends (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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