Here's Why TUI (ETR:TUI1) Has A Meaningful Debt Burden

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 can see that TUI AG (ETR:TUI1) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TUI

How Much Debt Does TUI Carry?

You can click the graphic below for the historical numbers, but it shows that TUI had €1.47b of debt in June 2023, down from €1.78b, one year before. But it also has €2.22b in cash to offset that, meaning it has €747.6m net cash.

How Healthy Is TUI's Balance Sheet?

We can see from the most recent balance sheet that TUI had liabilities of €10.9b falling due within a year, and liabilities of €5.09b due beyond that. Offsetting these obligations, it had cash of €2.22b as well as receivables valued at €1.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €12.5b.

The deficiency here weighs heavily on the €2.88b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, TUI would likely require a major re-capitalisation if it had to pay its creditors today. Given that TUI has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

We also note that TUI improved its EBIT from a last year's loss to a positive €403m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TUI 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. While TUI 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. Over the last year, TUI actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While TUI does have more liabilities than liquid assets, it also has net cash of €747.6m. And it impressed us with free cash flow of €546m, being 135% of its EBIT. Despite its cash we think that TUI seems to struggle to handle its total liabilities, so we are wary of the stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for TUI you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.