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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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Teledyne Technologies Incorporated (NYSE:TDY) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Teledyne Technologies's Net Debt?
As you can see below, Teledyne Technologies had US$641.5m of debt at January 2021, down from US$850.6m a year prior. However, its balance sheet shows it holds US$673.1m in cash, so it actually has US$31.6m net cash.
How Healthy Is Teledyne Technologies' Balance Sheet?
We can see from the most recent balance sheet that Teledyne Technologies had liabilities of US$760.9m falling due within a year, and liabilities of US$1.08b due beyond that. Offsetting this, it had US$673.1m in cash and US$624.1m in receivables that were due within 12 months. So it has liabilities totalling US$542.8m more than its cash and near-term receivables, combined.
Since publicly traded Teledyne Technologies shares are worth a very impressive total of US$14.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Teledyne Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the other side of the story is that Teledyne Technologies saw its EBIT decline by 2.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Teledyne Technologies 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. Teledyne Technologies 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, Teledyne Technologies 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.
We could understand if investors are concerned about Teledyne Technologies's liabilities, but we can be reassured by the fact it has has net cash of US$31.6m. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$475m. So is Teledyne Technologies's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Teledyne Technologies 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.
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. 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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