These 4 Measures Indicate That Tenaris (BIT:TEN) Is Using Debt Safely

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. Importantly, Tenaris S.A. (BIT:TEN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tenaris

How Much Debt Does Tenaris Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Tenaris had US$728.8m of debt, an increase on US$331.1m, over one year. But it also has US$1.53b in cash to offset that, meaning it has US$801.2m net cash.

How Healthy Is Tenaris' Balance Sheet?

We can see from the most recent balance sheet that Tenaris had liabilities of US$2.79b falling due within a year, and liabilities of US$727.4m due beyond that. On the other hand, it had cash of US$1.53b and US$2.78b worth of receivables due within a year. So it can boast US$793.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Tenaris could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tenaris boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Tenaris grew its EBIT by 299% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Tenaris 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, a company can only pay off debt with cold hard cash, not accounting profits. Tenaris 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, Tenaris produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tenaris has US$801.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 299% year-on-year EBIT growth. So we don't think Tenaris's use of debt is risky. 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, we've discovered 3 warning signs for Tenaris (1 is potentially serious!) that you should be aware of before investing here.

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.