These 4 Measures Indicate That TimkenSteel (NYSE:TMST) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, TimkenSteel Corporation (NYSE:TMST) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TimkenSteel

What Is TimkenSteel's Net Debt?

As you can see below, TimkenSteel had US$44.9m of debt at December 2021, down from US$78.2m a year prior. However, its balance sheet shows it holds US$259.6m in cash, so it actually has US$214.7m net cash.

How Strong Is TimkenSteel's Balance Sheet?

According to the last reported balance sheet, TimkenSteel had liabilities of US$250.8m due within 12 months, and liabilities of US$243.5m due beyond 12 months. Offsetting this, it had US$259.6m in cash and US$100.5m in receivables that were due within 12 months. So it has liabilities totalling US$134.2m more than its cash and near-term receivables, combined.

Of course, TimkenSteel has a market capitalization of US$911.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, TimkenSteel boasts net cash, so it's fair to say it does not have a heavy debt load!

Although TimkenSteel made a loss at the EBIT level, last year, it was also good to see that it generated US$200m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TimkenSteel 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TimkenSteel 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. Over the last year, TimkenSteel recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although TimkenSteel's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$214.7m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in US$185m. So we don't think TimkenSteel's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for TimkenSteel (of which 1 makes us a bit uncomfortable!) you should know about.

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. 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.