Is TT Electronics (LON:TTG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies TT Electronics plc (LON:TTG) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is TT Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that TT Electronics had UK£149.3m of debt in December 2024, down from UK£183.1m, one year before. However, because it has a cash reserve of UK£69.2m, its net debt is less, at about UK£80.1m.

How Healthy Is TT Electronics' Balance Sheet?

The latest balance sheet data shows that TT Electronics had liabilities of UK£146.3m due within a year, and liabilities of UK£171.1m falling due after that. Offsetting this, it had UK£69.2m in cash and UK£88.2m in receivables that were due within 12 months. So it has liabilities totalling UK£160.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of UK£135.2m, we think shareholders really should watch TT Electronics's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TT Electronics 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.

Check out our latest analysis for TT Electronics

In the last year TT Electronics had a loss before interest and tax, and actually shrunk its revenue by 15%, to UK£521m. We would much prefer see growth.

Caveat Emptor

Not only did TT Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£23m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of UK£53m. And until that time we think this is a risky stock. 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. For example - TT Electronics has 1 warning sign we think 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.