Is Texas Instruments (NASDAQ:TXN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Texas Instruments Incorporated (NASDAQ:TXN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the US Semiconductor industry.

What Is Texas Instruments's Debt?

As you can see below, at the end of June 2022, Texas Instruments had US$7.24b of debt, up from US$6.25b a year ago. Click the image for more detail. But it also has US$8.39b in cash to offset that, meaning it has US$1.14b net cash.

A Look At Texas Instruments' Liabilities

The latest balance sheet data shows that Texas Instruments had liabilities of US$2.56b due within a year, and liabilities of US$8.07b falling due after that. On the other hand, it had cash of US$8.39b and US$2.19b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Texas Instruments' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$141.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Texas Instruments also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Texas Instruments has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Texas Instruments 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 78% 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

We could understand if investors are concerned about Texas Instruments's liabilities, but we can be reassured by the fact it has has net cash of US$1.14b. And it impressed us with its EBIT growth of 36% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Texas Instruments (of which 2 are concerning!) you should know about.

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.