Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Texas Instruments Incorporated (NASDAQ:TXN) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Texas Instruments Carry?
As you can see below, at the end of June 2022, Texas Instruments had US$7.24b of debt, up from US$6.25b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$8.39b in cash, so it actually has US$1.14b net cash.
How Healthy Is Texas Instruments' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Texas Instruments had liabilities of US$2.56b due within 12 months and liabilities of US$8.07b due beyond that. Offsetting this, it had US$8.39b in cash and US$2.19b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Texas Instruments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$157.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Texas Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Texas Instruments has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Texas Instruments can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Texas Instruments has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Texas Instruments produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Texas Instruments has US$1.14b in net cash. And it impressed us with its EBIT growth of 36% over the last year. So is Texas Instruments's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Texas Instruments (2 make us uncomfortable!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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