We Think Texas Instruments (NASDAQ:TXN) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Texas Instruments Incorporated (NASDAQ:TXN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Texas Instruments

How Much Debt Does Texas Instruments Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Texas Instruments had US$7.74b of debt, an increase on US$6.80b, over one year. However, its balance sheet shows it holds US$9.74b in cash, so it actually has US$2.00b net cash.

How Strong Is Texas Instruments' Balance Sheet?

According to the last reported balance sheet, Texas Instruments had liabilities of US$2.57b due within 12 months, and liabilities of US$8.77b due beyond 12 months. On the other hand, it had cash of US$9.74b and US$1.70b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

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$171.4b 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 52% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Texas Instruments generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Texas Instruments has net cash of US$2.00b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$6.3b, being 85% of its EBIT. So is Texas Instruments's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Texas Instruments has 1 warning sign we think you should be aware of.

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.