Tate & Lyle (LON:TATE) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Tate & Lyle plc (LON:TATE) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Tate & Lyle

How Much Debt Does Tate & Lyle Carry?

As you can see below, Tate & Lyle had UK£515.0m of debt at September 2024, down from UK£588.0m a year prior. But it also has UK£594.0m in cash to offset that, meaning it has UK£79.0m net cash.

How Strong Is Tate & Lyle's Balance Sheet?

We can see from the most recent balance sheet that Tate & Lyle had liabilities of UK£354.0m falling due within a year, and liabilities of UK£662.0m due beyond that. Offsetting these obligations, it had cash of UK£594.0m as well as receivables valued at UK£278.0m due within 12 months. So it has liabilities totalling UK£144.0m more than its cash and near-term receivables, combined.

Of course, Tate & Lyle has a market capitalization of UK£2.32b, 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, Tate & Lyle also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Tate & Lyle grew its EBIT by 3.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tate & Lyle 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 company can only pay off debt with cold hard cash, not accounting profits. While Tate & Lyle 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 three years, Tate & Lyle recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Tate & Lyle's liabilities, but we can be reassured by the fact it has has net cash of UK£79.0m. On top of that, it increased its EBIT by 3.4% in the last twelve months. So we are not troubled with Tate & Lyle's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Tate & Lyle you should be aware of.

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.