TrueBlue (NYSE:TBI) Has A Pretty Healthy Balance Sheet
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies TrueBlue, Inc. (NYSE:TBI) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for TrueBlue
How Much Debt Does TrueBlue Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 TrueBlue had US$45.0m of debt, an increase on US$24.7m, over one year. But it also has US$92.1m in cash to offset that, meaning it has US$47.1m net cash.
A Look At TrueBlue's Liabilities
Zooming in on the latest balance sheet data, we can see that TrueBlue had liabilities of US$220.0m due within 12 months and liabilities of US$270.2m due beyond that. Offsetting these obligations, it had cash of US$92.1m as well as receivables valued at US$242.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$156.1m.
TrueBlue has a market capitalization of US$565.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, TrueBlue also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact TrueBlue's saving grace is its low debt levels, because its EBIT has tanked 70% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TrueBlue's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TrueBlue 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, TrueBlue 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.
Summing up
While TrueBlue does have more liabilities than liquid assets, it also has net cash of US$47.1m. The cherry on top was that in converted 153% of that EBIT to free cash flow, bringing in US$131m. So we don't have any problem with TrueBlue's use of debt. Even though TrueBlue lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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