Does Transcat (NASDAQ:TRNS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Transcat, Inc. (NASDAQ:TRNS) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Transcat

How Much Debt Does Transcat Carry?

The image below, which you can click on for greater detail, shows that Transcat had debt of US$4.73m at the end of December 2023, a reduction from US$49.2m over a year. But it also has US$35.2m in cash to offset that, meaning it has US$30.5m net cash.

How Healthy Is Transcat's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Transcat had liabilities of US$29.4m due within 12 months and liabilities of US$33.3m due beyond that. Offsetting this, it had US$35.2m in cash and US$44.1m in receivables that were due within 12 months. So it actually has US$16.7m more liquid assets than total liabilities.

Having regard to Transcat's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.12b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Transcat has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Transcat grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Transcat'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Transcat 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. Over the most recent three years, Transcat recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Transcat has US$30.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Transcat's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Transcat is showing 2 warning signs in our investment analysis , you should know about...

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.