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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. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt can lead to bankruptcy. We can see that TXT e-solutions SpA (BIT: TXT) uses debt in his business. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for TXT electronic solutions
What is the debt of TXT e-solutions?
You can click on the graph below for historical figures, but it shows that as of September 2021, TXT electronics solutions had 63.9 million euros in debt, an increase from 50.9 million euros. euros, over one year. But on the other hand, it also has 72.7 million euros of cash, which leads to a net cash of 8.78 million euros.
How healthy is TXT e-solutions’ balance sheet?
We can see from the most recent balance sheet that TXT e-solutions had liabilities of € 60.0 million due within one year, and liabilities of € 39.1 million due beyond. On the other hand, it had cash of € 72.7 million and € 46.3 million in receivables within one year. So he actually has € 19.8m Following liquid assets as total liabilities.
This surplus suggests that TXT e-solutions is using debt in a way that appears to be both safe and prudent. Because he has a lot of assets, he is unlikely to have any problems with his lenders. In short, TXT e-solutions has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!
On top of that, we are happy to report that TXT e-solutions has increased its EBIT by 57%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether TXT electronics solutions can strengthen its bottom line over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. Although TXT e-solutions has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it is. this cash balance is built (or eroded). In the last three years, TXT e-solutions recorded a total negative free cash flow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
In summary
While we sympathize with investors who find debt worrying, you should keep in mind that TXT e-solutions has net cash of $ 8.78 million, as well as more liquid assets than liabilities. And we liked the appearance of the 57% year-over-year EBIT growth from last year. So is TXT e-solutions debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for TXT e-solutions you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in any of the stocks mentioned.
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