Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Teradata Corporation (NYSE:TDC) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Teradata's Debt?
As you can see below, Teradata had US$511.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$635.0m in cash, leading to a US$124.0m net cash position.
How Strong Is Teradata's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Teradata had liabilities of US$865.0m due within 12 months and liabilities of US$891.0m due beyond that. Offsetting these obligations, it had cash of US$635.0m as well as receivables valued at US$383.0m due within 12 months. So its liabilities total US$738.0m more than the combination of its cash and short-term receivables.
Given Teradata has a market capitalization of US$3.80b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Teradata also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably Teradata's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Teradata'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Teradata 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. Happily for any shareholders, Teradata actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While Teradata does have more liabilities than liquid assets, it also has net cash of US$124m. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in US$51m. So we don't have any problem with Teradata's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Teradata insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying 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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