RE:RE:RE:Be Careful Out There Perhaps people misinterpreted my initial post.
I was not saying CTS was similar shape financially as MCLD, nor was I saying that CTS is destined for the same fate.
My point was that, given higher interest rates, inflation, a likely recession at some point in 2023, etc., companies holding too much debt are not in a good position. I think there will be more companies seeking creditor protection in the small cap tech space, with the most troubled (like MCLD) leading the way.
Even as things stand today, I suspect input costs are higher for hardware products and bigger markups need to be applied to generate the same profit margins, potential new customers are tightening their belts and may just stick with the IT systems they already have in place instead of upgrading, etc. This does not bode well for future sales, and companies with too much debt will likely find it much more difficult to navigate this environment than those with much cleaner balance sheets. I believe this reduces the value of CTS as a company, be it with regard to the investment community as a whole (day-to-day trading of CTS shares) or to a potential suitor out there who may be willing to purchase it if the takeout price per share is low enough.
Information from CTS's latest financial statements dated December 31, 2022 (see SEDAR):
Payables (825M) higher than Receivables (782M).
Cash + Restricted Cash + Receivables = 947M
Payables + Borrowings = 1,247M
Total Debt-to-Equity Ratio: 1,618M / 631M = 2.56
"Note 9" re. Borrowings:
The borrowings outstanding as at December 31, 2022 and 2021 were as follows:
Revolver Credit Facility 420,439
Other third-party facilities 1,289
Total 421,728
Borrowings particulars:
On July 28, 2022, the Company entered into a global revolving credit agreement (the “Revolver Credit Facility”) with a syndicate of Canadian and US lenders, led by J.P. Morgan and the Canadian Imperial Bank of Commerce (“CIBC”).
The Revolver Credit Facility can be drawn to a maximum of $500,000 and includes an uncommitted accordion feature of $100,000, for a total borrowing capacity of up to $600,000, and allows the Company to borrow in foreign currencies.
Interest is payable monthly at an interest rate that generally approximates the Secured Overnight Financing Rate (“SOFR”), plus applicable bank margin ranging from 1.25% to 2.25%. The effective interest rate for the year ended December 31, 2022 was 5.1%.
The Revolver Credit Facility includes certain financial covenants. The Company was in full compliance with all financial covenants as at December 31, 2022.
(End of Financial Statements text)
Thus, as at December 31, 2022, CTS has used 420M out of the 600M available, so a significant amount of untapped borrowing capacity can still be accessed, but of course the more you borrow, the more you owe and the higher the total amount of interest paid on the amount borrowed, which is not something I'd recommend doing in the current economic environment. I suspect CTS agrees, but the debt was still too high in my view as at December 31. The financial statements dated March 31, 2023 will show how much progress if any CTS has made in bringing its debt down.