Technip Energies (EPA:TE) 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.' 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. We note that Technip Energies N.V. (EPA:TE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 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 Technip Energies

What Is Technip Energies's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Technip Energies had debt of €767.4m, up from €731.4m in one year. However, it does have €3.32b in cash offsetting this, leading to net cash of €2.55b.

How Strong Is Technip Energies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Technip Energies had liabilities of €5.81b due within 12 months and liabilities of €1.16b due beyond that. Offsetting this, it had €3.32b in cash and €1.78b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.87b.

While this might seem like a lot, it is not so bad since Technip Energies has a market capitalization of €4.71b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Technip Energies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Technip Energies grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Technip Energies'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 Technip Energies 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 most recent three years, Technip Energies recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Technip Energies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.55b. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with Technip Energies's debt use. We'd be motivated to research the stock further if we found out that Technip Energies insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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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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.