Does TX Group (VTX:TXGN) Have A Healthy Balance Sheet?

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.' 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 TX Group AG (VTX:TXGN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for TX Group

How Much Debt Does TX Group Carry?

You can click the graphic below for the historical numbers, but it shows that TX Group had CHF11.9m of debt in December 2022, down from CHF78.4m, one year before. However, it does have CHF443.5m in cash offsetting this, leading to net cash of CHF431.6m.

How Strong Is TX Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TX Group had liabilities of CHF480.0m due within 12 months and liabilities of CHF261.0m due beyond that. On the other hand, it had cash of CHF443.5m and CHF297.4m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to TX Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF1.07b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, TX Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that TX Group's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TX Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TX 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 last three years, TX Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about TX Group's liabilities, but we can be reassured by the fact it has has net cash of CHF431.6m. The cherry on top was that in converted 397% of that EBIT to free cash flow, bringing in CHF80m. So we are not troubled with TX Group's debt use. 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 example - TX Group has 2 warning signs we think 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.