Here's Why Telix Pharmaceuticals (ASX:TLX) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Telix Pharmaceuticals Limited (ASX:TLX) makes use of debt. But is this debt a concern to shareholders?

We've discovered 2 warning signs about Telix Pharmaceuticals. View them for free.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Telix Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Telix Pharmaceuticals had AU$570.8m of debt, an increase on AU$9.17m, over one year. But on the other hand it also has AU$710.3m in cash, leading to a AU$139.5m net cash position.

A Look At Telix Pharmaceuticals' Liabilities

According to the last reported balance sheet, Telix Pharmaceuticals had liabilities of AU$330.9m due within 12 months, and liabilities of AU$617.3m due beyond 12 months. Offsetting this, it had AU$710.3m in cash and AU$149.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$88.4m.

This state of affairs indicates that Telix Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$8.50b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Telix Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Telix Pharmaceuticals

On top of that, Telix Pharmaceuticals grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. 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 Telix Pharmaceuticals 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. Telix Pharmaceuticals 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 two years, Telix Pharmaceuticals reported free cash flow worth 5.7% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Telix Pharmaceuticals has AU$139.5m in net cash. And we liked the look of last year's 58% year-on-year EBIT growth. So we don't think Telix Pharmaceuticals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Telix Pharmaceuticals (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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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.