TCM Group (CPH:TCM) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TCM Group A/S (CPH:TCM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TCM Group

How Much Debt Does TCM Group Carry?

As you can see below, TCM Group had kr.150.9m of debt at September 2020, down from kr.176.3m a year prior. However, it does have kr.202.1m in cash offsetting this, leading to net cash of kr.51.2m.

How Strong Is TCM Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TCM Group had liabilities of kr.266.0m due within 12 months and liabilities of kr.204.9m due beyond that. Offsetting this, it had kr.202.1m in cash and kr.83.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.185.4m.

Of course, TCM Group has a market capitalization of kr.1.59b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, TCM Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, TCM Group saw its EBIT drop by 6.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TCM 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TCM 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. During the last three years, TCM Group generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While TCM Group does have more liabilities than liquid assets, it also has net cash of kr.51.2m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in kr.116m. So we don't think TCM Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in TCM Group, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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