We Think TUI (ETR:TUI1) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies TUI AG (ETR:TUI1) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TUI

What Is TUI's Debt?

As you can see below, at the end of June 2024, TUI had €1.94b of debt, up from €1.47b a year ago. Click the image for more detail. However, it does have €2.55b in cash offsetting this, leading to net cash of €612.7m.

A Look At TUI's Liabilities

The latest balance sheet data shows that TUI had liabilities of €11.0b due within a year, and liabilities of €5.79b falling due after that. Offsetting these obligations, it had cash of €2.55b as well as receivables valued at €1.42b due within 12 months. So it has liabilities totalling €12.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €3.89b 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'd watch its balance sheet closely, without a doubt. After all, TUI would likely require a major re-capitalisation if it had to pay its creditors today. TUI boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, TUI's EBIT launched higher than Elon Musk, gaining a whopping 124% on last year. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, TUI actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While TUI does have more liabilities than liquid assets, it also has net cash of €612.7m. And it impressed us with free cash flow of €1.0b, being 121% of its EBIT. So we don't have any problem with TUI's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in TUI, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.