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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, The TJX Companies, Inc. (NYSE:TJX) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is TJX Companies's Debt?
As you can see below, TJX Companies had US$2.23b of debt, at May 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$2.24b in cash offsetting this, leading to net cash of US$688.0k.
A Look At TJX Companies's Liabilities
Zooming in on the latest balance sheet data, we can see that TJX Companies had liabilities of US$6.58b due within 12 months and liabilities of US$10.8b due beyond that. On the other hand, it had cash of US$2.24b and US$393.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.7b.
While this might seem like a lot, it is not so bad since TJX Companies has a huge market capitalization of US$67.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, TJX Companies also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that TJX Companies has increased its EBIT by 2.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TJX Companies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TJX Companies 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 most recent three years, TJX Companies recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While TJX Companies does have more liabilities than liquid assets, it also has net cash of US$688k. So we don't have any problem with TJX Companies's use of debt. We'd be motivated to research the stock further if we found out that TJX Companies insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.