These 4 Measures Indicate That Tessenderlo Group (EBR:TESB) Is Using Debt Reasonably Well

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.' 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 note that Tessenderlo Group NV (EBR:TESB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tessenderlo Group

How Much Debt Does Tessenderlo Group Carry?

You can click the graphic below for the historical numbers, but it shows that Tessenderlo Group had €202.6m of debt in June 2023, down from €339.4m, one year before. But it also has €220.7m in cash to offset that, meaning it has €18.1m net cash.

How Healthy Is Tessenderlo Group's Balance Sheet?

The latest balance sheet data shows that Tessenderlo Group had liabilities of €612.0m due within a year, and liabilities of €502.1m falling due after that. Offsetting this, it had €220.7m in cash and €554.4m in receivables that were due within 12 months. So it has liabilities totalling €339.0m more than its cash and near-term receivables, combined.

Given Tessenderlo Group has a market capitalization of €1.74b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tessenderlo Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Tessenderlo Group's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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. While Tessenderlo Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Tessenderlo Group recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Tessenderlo Group does have more liabilities than liquid assets, it also has net cash of €18.1m. So we don't have any problem with Tessenderlo Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tessenderlo Group is showing 3 warning signs in our investment analysis , you should know about...

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.