David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Techtronic Industries Company Limited (HKG:669) does carry debt. But should shareholders be worried about its use of debt?
We check all companies for important risks. See what we found for Techtronic Industries in our free report.Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Techtronic Industries's Debt?
As you can see below, Techtronic Industries had US$1.28b of debt at December 2024, down from US$1.95b a year prior. However, its balance sheet shows it holds US$1.46b in cash, so it actually has US$178.8m net cash.
How Healthy Is Techtronic Industries' Balance Sheet?
According to the last reported balance sheet, Techtronic Industries had liabilities of US$4.92b due within 12 months, and liabilities of US$1.61b due beyond 12 months. On the other hand, it had cash of US$1.46b and US$2.02b worth of receivables due within a year. So it has liabilities totalling US$3.05b more than its cash and near-term receivables, combined.
Given Techtronic Industries has a humongous market capitalization of US$18.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Techtronic Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Techtronic Industries
Also good is that Techtronic Industries grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Techtronic Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Techtronic Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Techtronic Industries recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While Techtronic Industries does have more liabilities than liquid assets, it also has net cash of US$178.8m. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$1.6b. So is Techtronic Industries's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Techtronic Industries would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.