These Four Indicators Suggest That Canadian Tire Corporation (TSE:CTC.A) Is Managing Debt Riskily

2 min read | February 13, 2025 04:30 AM PST | By Team Kalkine Media

These Four Indicators Suggest That Canadian Tire Corporation (TSE:CTC.A) Is Managing Debt Riskily

Risks Associated with Debt

Debt can be a valuable tool for growth until a company struggles to make payments through fresh capital or cash flow, which could lead to dilution of equity or, in worst scenarios, liquidation. Ideally, businesses balance their debt with growing returns.

Net Debt Overview of Canadian Tire Corporation

By September 2024, Canadian Tire’s debt was CA$9.09 billion, relatively unchanged from the previous year. The need to understand the company's balance sheet is critical. The liabilities amounted to CA$16.18 billion, supplemented by CA$122.9 million in cash and CA$1.38 billion in receivables, leaving a liability balance discrepancy of CA$14.7 billion.

A Closer Look at Financial Ratios

Canadian Tire Corporation’s debt to EBITDA ratio stands at 5.3, indicating a high debt level. Yet, with an interest coverage ratio of 3.6 times, there is some ability to manage interest payments. However, a decline in EBIT by 22% in the past year remains a significant concern.

Importance of Future Earnings

A strong balance sheet is vital, but future earnings are crucial to managing debt healthily. The conversion of EBIT to cash flow is currently weaker than expected, with cash flow covering just 37% of EBIT over the last three years. This limitation adds to the concern surrounding debt.

Ultimately, while some might find opportunities in such scenarios, Canadian Tire's current debt position might not align with a more conservative investment strategy. Understanding non-balance sheet risks and exploring growth without dependence on debt can be beneficial strategies for investors.

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