TXT e-solutions (BIT:TXT) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies TXT e-solutions S.p.A. (BIT:TXT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for TXT e-solutions

How Much Debt Does TXT e-solutions Carry?

The chart below, which you can click on for greater detail, shows that TXT e-solutions had €53.0m in debt in December 2020; about the same as the year before. But it also has €80.1m in cash to offset that, meaning it has €27.1m net cash.

How Healthy Is TXT e-solutions' Balance Sheet?

According to the last reported balance sheet, TXT e-solutions had liabilities of €55.4m due within 12 months, and liabilities of €32.1m due beyond 12 months. Offsetting this, it had €80.1m in cash and €45.9m in receivables that were due within 12 months. So it can boast €38.5m more liquid assets than total liabilities.

This luscious liquidity implies that TXT e-solutions' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, TXT e-solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, TXT e-solutions grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TXT e-solutions'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 TXT e-solutions 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. During the last three years, TXT e-solutions burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TXT e-solutions has net cash of €27.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 43% over the last year. So is TXT e-solutions'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with TXT e-solutions (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.
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