We Think Tootsie Roll Industries (NYSE:TR) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tootsie Roll Industries, Inc. (NYSE:TR) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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

See 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$8.59m in debt in December 2023; about the same as the year before. But it also has US$171.4m in cash to offset that, meaning it has US$162.8m net cash.

How Strong 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$94.9m due within 12 months and liabilities of US$166.4m due beyond that. Offsetting this, it had US$171.4m in cash and US$64.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$25.4m.

Having regard to Tootsie Roll Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.21b company is short on cash, but still worth keeping an eye on the 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!

Also positive, Tootsie Roll Industries grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tootsie Roll Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 61% 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 look at a company's total liabilities, it is very reassuring that Tootsie Roll Industries has US$162.8m in net cash. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Tootsie Roll Industries's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tootsie Roll Industries, you may well want to click here to check an interactive graph of its earnings per share history.

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.