Tootsie Roll Industries (NYSE:TR) Could Easily Take On More Debt

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.' 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. Importantly, Tootsie Roll Industries, Inc. (NYSE:TR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tootsie Roll Industries

What Is Tootsie Roll Industries's Net Debt?

The chart below, which you can click on for greater detail, shows that Tootsie Roll Industries had US$8.45m in debt in September 2022; about the same as the year before. However, its balance sheet shows it holds US$145.7m in cash, so it actually has US$137.3m net cash.

How Healthy Is Tootsie Roll Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tootsie Roll Industries had liabilities of US$101.5m due within 12 months and liabilities of US$141.5m due beyond that. Offsetting these obligations, it had cash of US$145.7m as well as receivables valued at US$86.4m due within 12 months. So its liabilities total US$10.9m more than the combination of its cash and short-term receivables.

Having regard to Tootsie Roll Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$3.14b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Tootsie Roll Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Tootsie Roll Industries grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tootsie Roll Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tootsie Roll Industries 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, Tootsie Roll Industries produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Tootsie Roll Industries's liabilities, but we can be reassured by the fact it has has net cash of US$137.3m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in US$58m. So is Tootsie Roll Industries's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Tootsie Roll Industries .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.