These 4 Measures Indicate That TIM (BVMF:TIMS3) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TIM S.A. (BVMF:TIMS3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TIM

What Is TIM's Debt?

You can click the graphic below for the historical numbers, but it shows that TIM had R$3.10b of debt in June 2024, down from R$4.79b, one year before. However, it does have R$3.31b in cash offsetting this, leading to net cash of R$215.7m.

A Look At TIM's Liabilities

The latest balance sheet data shows that TIM had liabilities of R$11.8b due within a year, and liabilities of R$16.8b falling due after that. Offsetting these obligations, it had cash of R$3.31b as well as receivables valued at R$5.56b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$19.7b.

TIM has a market capitalization of R$44.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, TIM also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, TIM grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TIM 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. TIM 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, TIM actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although TIM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$215.7m. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in R$8.1b. So we don't think TIM's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for TIM that you should be aware of.

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.