Is Teradata (NYSE:TDC) Using Too Much Debt?
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.' 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. As with many other companies Teradata Corporation (NYSE:TDC) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Teradata
How Much Debt Does Teradata Carry?
You can click the graphic below for the historical numbers, but it shows that Teradata had US$441.0m of debt in September 2021, down from US$491.0m, one year before. However, it does have US$613.0m in cash offsetting this, leading to net cash of US$172.0m.
How Healthy Is Teradata's Balance Sheet?
According to the last reported balance sheet, Teradata had liabilities of US$955.0m due within 12 months, and liabilities of US$722.0m due beyond 12 months. Offsetting these obligations, it had cash of US$613.0m as well as receivables valued at US$302.0m due within 12 months. So it has liabilities totalling US$762.0m more than its cash and near-term receivables, combined.
Of course, Teradata has a market capitalization of US$5.14b, so these liabilities are probably manageable. 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, Teradata boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Teradata grew its EBIT by 739% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Teradata 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.
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. Over the last three years, Teradata actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
Although Teradata's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$172.0m. And it impressed us with free cash flow of US$392m, being 212% of its EBIT. So is Teradata'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. Be aware that Teradata is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...
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.
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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