These 4 Measures Indicate That TX Group (VTX:TXGN) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. As with many other companies TX Group AG (VTX:TXGN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TX Group

What Is TX Group's Net Debt?

As you can see below, TX Group had CHF25.0m of debt at December 2020, down from CHF40.0m a year prior. However, it does have CHF276.2m in cash offsetting this, leading to net cash of CHF251.1m.

How Strong Is TX Group's Balance Sheet?

According to the last reported balance sheet, TX Group had liabilities of CHF480.7m due within 12 months, and liabilities of CHF274.5m due beyond 12 months. Offsetting this, it had CHF276.2m in cash and CHF324.7m in receivables that were due within 12 months. So it has liabilities totalling CHF154.4m more than its cash and near-term receivables, combined.

Given TX Group has a market capitalization of CHF833.9m, 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, TX Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that TX Group's EBIT was down 93% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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

While TX Group does have more liabilities than liquid assets, it also has net cash of CHF251.1m. And it impressed us with free cash flow of CHF94m, being 207% of its EBIT. So we are not troubled with TX Group's debt use. 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. For example - TX Group has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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