Legendary fund manager Li Lu (backed by Charlie Munger) once said: Debt is often incurred when a business goes bankrupt, so it makes sense to consider a company’s balance sheet when considering a company’s risks.we can see it Tektronic Industries Company Limited (HKG:669) uses debt in its business. But the real question is whether this debt puts the company at risk.
When does debt become a problem
Debt helps a business until it struggles to pay it back with either new capital or free cash flow. there is. Although less common, we often see debt companies permanently diluting their shareholders. Of course, debt can be an important tool in business, especially in capital-heavy ones. When looking at debt levels, first consider both cash and debt levels together.
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What are Techtronic Industries’ liabilities?
You can click the chart below to see historical figures, and you can see that Techtronic Industries has $3.15 billion in debt in December 2022, down from $3.29 billion a year ago. Conversely, it has cash of US$1.67 billion and net debt of approximately US$1.48 billion.
Techtronic Industries Responsibilities
Our latest balance sheet shows that Techtronic Industries has $6.22 billion of debt due within one year and $1.89 billion of debt due beyond that time. Offsetting these obligations was US$1.67 billion in cash and US$1.69 billion worth of his receivables to be paid within 12 months. As such, it has a total liability of US$4.75 billion more than its cash and short-term receivables combined.
Techtronic Industries has a huge market capitalization of US$19.9 billion, so it’s very likely that it will be able to raise cash to improve its balance sheet if needed. However, it is clear that it is necessary to rigorously consider whether debt can be managed without dilution.
By dividing net debt by earnings before interest, taxes, depreciation and amortization (EBITDA), and calculating how easily earnings before interest and taxes (EBIT) can cover earnings, a company’s Measure your debt load. Expenses (interest cover). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (its interest coverage ratio).
Techtronic Industries has a net debt to EBITDA ratio of just 1.1. And that his EBIT is on the order of 27.0x, easily covering interest expense. So I’m pretty relaxed about using very conservative debt. Techtronic Industries’ EBIT was roughly flat last year, which shouldn’t matter given the company’s lack of significant debt. Clearly, the balance sheet is the starting point when analyzing debt levels. However, future earnings will determine, more than anything else, Techtronic Industries’ ability to maintain a healthy balance sheet. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
Finally, the business needs free cash flow to pay off its debt. Accounting profit doesn’t cut it. So the logical step is to look at the percentage of EBIT that matches the actual free cash flow. Over the past three years, Techtronic Industries has experienced significant aggregate negative free cash flow. Investors undoubtedly expect that situation to be reversed in due course, but that clearly means that the use of debt is more risky.
Techtronic Industries’ EBIT conversion to free cash flow and EBIT growth rates are definitely weighing it down in our assessment. But the good news is that EBIT appears to easily cover the interest expense. From all of the above angles, Techtronic Industries appears to be a slightly riskier investment as a result of its debt. This isn’t necessarily a bad thing, as leverage can boost stock returns, but it’s something to be aware of. Given concerns about the company’s balance sheet, it seems prudent to see if insiders have recently sold shares.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, don’t hesitate to discover our exclusive list of net cash growth stocks today.
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To find out if Techtronic Industries might be overrated or underrated, check out this comprehensive analysis. Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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