Is TX Group (VTX:TXGN) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 should shareholders be worried about its use of debt?

We've discovered 1 warning sign about TX Group. View them for free.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TX Group's Debt?

As you can see below, TX Group had CHF17.6m of debt at December 2024, down from CHF24.8m a year prior. However, its balance sheet shows it holds CHF413.3m in cash, so it actually has CHF395.7m net cash.

A Look At TX Group's Liabilities

Zooming in on the latest balance sheet data, we can see that TX Group had liabilities of CHF487.6m due within 12 months and liabilities of CHF360.2m due beyond that. Offsetting this, it had CHF413.3m in cash and CHF263.4m in receivables that were due within 12 months. So it has liabilities totalling CHF171.1m more than its cash and near-term receivables, combined.

Since publicly traded TX Group shares are worth a total of CHF2.03b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TX Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for TX Group

In the last year TX Group had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to CHF942m. That's not what we would hope to see.

So How Risky Is TX Group?

While TX Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CHF232m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with TX Group .

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.