Here's Why Tessenderlo Group (EBR:TESB) Can Manage Its Debt Responsibly

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.' 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 Tessenderlo Group NV (EBR:TESB) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does Tessenderlo Group Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Tessenderlo Group had debt of €202.9m, up from €177.6m in one year. However, its balance sheet shows it holds €252.4m in cash, so it actually has €49.5m net cash.

How Strong Is Tessenderlo Group's Balance Sheet?

According to the last reported balance sheet, Tessenderlo Group had liabilities of €599.7m due within 12 months, and liabilities of €422.7m due beyond 12 months. On the other hand, it had cash of €252.4m and €450.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €319.6m.

Tessenderlo Group has a market capitalization of €1.51b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tessenderlo Group boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Tessenderlo Group

The modesty of its debt load may become crucial for Tessenderlo Group if management cannot prevent a repeat of the 62% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tessenderlo Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tessenderlo Group 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 most recent three years, Tessenderlo Group recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Tessenderlo Group does have more liabilities than liquid assets, it also has net cash of €49.5m. So we are not troubled with Tessenderlo Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Tessenderlo Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.