Is Trinseo (NYSE:TSE) Using Debt Sensibly?

Warren Buffett famously said, '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. We can see that Trinseo PLC (NYSE:TSE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Trinseo

What Is Trinseo's Net Debt?

As you can see below, Trinseo had US$2.32b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$217.1m in cash, and so its net debt is US$2.10b.

How Strong Is Trinseo's Balance Sheet?

According to the last reported balance sheet, Trinseo had liabilities of US$717.8m due within 12 months, and liabilities of US$2.65b due beyond 12 months. On the other hand, it had cash of US$217.1m and US$622.5m worth of receivables due within a year. So its liabilities total US$2.53b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$537.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Trinseo would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Trinseo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Trinseo had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$4.6b. That's not what we would hope to see.

Caveat Emptor

Not only did Trinseo's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$187m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$52m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example - Trinseo has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.