Texas Instruments (NASDAQ:TXN) Has A Rock Solid Balance Sheet

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 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. Importantly, Texas Instruments Incorporated (NASDAQ:TXN) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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, at the end of September 2021, Texas Instruments had US$7.74b of debt, up from US$6.80b a year ago. Click the image for more detail. However, it does have US$9.78b in cash offsetting this, leading to net cash of US$2.04b.

How Strong Is Texas Instruments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Texas Instruments had liabilities of US$2.41b due within 12 months and liabilities of US$8.71b due beyond that. Offsetting these obligations, it had cash of US$9.78b as well as receivables valued at US$1.65b due within 12 months. So it can boast US$313.0m more liquid assets than total liabilities.

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$172.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Texas Instruments boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Texas Instruments grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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 Texas Instruments 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 three years, Texas Instruments recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Texas Instruments has US$2.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$7.1b, being 94% of its EBIT. So is Texas Instruments's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Texas Instruments would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.