Does Tabcorp Holdings (ASX:TAH) Have A Healthy Balance Sheet?

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. We can see that Tabcorp Holdings Limited (ASX:TAH) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Tabcorp Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tabcorp Holdings had AU$135.3m of debt in June 2022, down from AU$2.57b, one year before. But on the other hand it also has AU$199.4m in cash, leading to a AU$64.1m net cash position.

A Look At Tabcorp Holdings' Liabilities

According to the last reported balance sheet, Tabcorp Holdings had liabilities of AU$864.3m due within 12 months, and liabilities of AU$473.3m due beyond 12 months. On the other hand, it had cash of AU$199.4m and AU$129.9m worth of receivables due within a year. So its liabilities total AU$1.01b more than the combination of its cash and short-term receivables.

Tabcorp Holdings has a market capitalization of AU$2.36b, 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, Tabcorp Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Tabcorp Holdings'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.

Over 12 months, Tabcorp Holdings made a loss at the EBIT level, and saw its revenue drop to AU$2.4b, which is a fall of 3.9%. That's not what we would hope to see.

So How Risky Is Tabcorp Holdings?

While Tabcorp Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$535m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tabcorp Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.