Is TX Group (VTX:TXGN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that TX Group AG (VTX:TXGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TX Group

What Is TX Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 TX Group had debt of CHF24.7m, up from CHF11.9m in one year. But it also has CHF333.8m in cash to offset that, meaning it has CHF309.1m net cash.

How Strong Is TX Group's Balance Sheet?

The latest balance sheet data shows that TX Group had liabilities of CHF517.6m due within a year, and liabilities of CHF335.0m falling due after that. On the other hand, it had cash of CHF333.8m and CHF288.5m worth of receivables due within a year. So it has liabilities totalling CHF230.3m more than its cash and near-term receivables, combined.

Given TX Group has a market capitalization of CHF1.63b, 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. 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.

Even more impressive was the fact that TX Group grew its EBIT by 106% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, TX Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although TX Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF309.1m. And it impressed us with free cash flow of CHF156m, being 297% of its EBIT. So we don't think TX Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for TX Group you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.