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

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. Importantly, TX Group AG (VTX:TXGN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TX Group

What Is TX Group's Debt?

As you can see below, at the end of December 2021, TX Group had CHF78.4m of debt, up from CHF25.0m a year ago. Click the image for more detail. But it also has CHF456.5m in cash to offset that, meaning it has CHF378.1m net cash.

How Healthy Is TX Group's Balance Sheet?

According to the last reported balance sheet, TX Group had liabilities of CHF474.7m due within 12 months, and liabilities of CHF308.6m due beyond 12 months. On the other hand, it had cash of CHF456.5m and CHF398.7m worth of receivables due within a year. So it can boast CHF71.8m more liquid assets than total liabilities.

This short term liquidity is a sign that TX Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TX Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that TX Group grew its EBIT by 845% 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 it is future earnings, more than anything, that will determine TX Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TX Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, TX Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case TX Group has CHF378.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CHF130m, being 292% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example TX Group has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.