Tinexta (BIT:TNXT) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Tinexta S.p.A. (BIT:TNXT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tinexta

What Is Tinexta's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tinexta had €284.9m of debt in March 2023, down from €350.9m, one year before. However, its balance sheet shows it holds €315.7m in cash, so it actually has €30.8m net cash.

How Strong Is Tinexta's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tinexta had liabilities of €263.5m due within 12 months and liabilities of €307.8m due beyond that. Offsetting these obligations, it had cash of €315.7m as well as receivables valued at €133.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €121.8m.

Since publicly traded Tinexta shares are worth a total of €773.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Tinexta boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Tinexta has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tinexta's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tinexta 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, Tinexta generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Tinexta's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €30.8m. And it impressed us with free cash flow of €32m, being 98% of its EBIT. So is Tinexta's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tinexta (of which 1 is a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.