Does Texas Instruments (NASDAQ:TXN) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We note that Texas Instruments Incorporated (NASDAQ:TXN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Texas Instruments

How Much Debt Does Texas Instruments Carry?

As you can see below, Texas Instruments had US$7.94b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$9.09b in cash offsetting this, leading to net cash of US$1.15b.

How Healthy Is Texas Instruments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Texas Instruments had liabilities of US$2.80b due within 12 months and liabilities of US$8.75b due beyond that. Offsetting this, it had US$9.09b in cash and US$2.04b in receivables that were due within 12 months. So its liabilities total US$420.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Texas Instruments' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$162.5b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Texas Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Texas Instruments has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Texas Instruments'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Texas Instruments 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, Texas Instruments recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Texas Instruments has US$1.15b in net cash. And it impressed us with its EBIT growth of 28% over the last year. So is Texas Instruments's debt a risk? It doesn't seem so to us. 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, we've discovered 3 warning signs for Texas Instruments (2 are a bit unpleasant!) that you should be aware of before investing here.

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.