Here's Why Teradata (NYSE:TDC) Can Manage Its Debt Responsibly

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 Teradata Corporation (NYSE:TDC) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Teradata

What Is Teradata's Debt?

The chart below, which you can click on for greater detail, shows that Teradata had US$482.0m in debt in December 2020; about the same as the year before. But it also has US$529.0m in cash to offset that, meaning it has US$47.0m net cash.

How Strong Is Teradata's Balance Sheet?

According to the last reported balance sheet, Teradata had liabilities of US$952.0m due within 12 months, and liabilities of US$841.0m due beyond 12 months. Offsetting these obligations, it had cash of US$529.0m as well as receivables valued at US$416.0m due within 12 months. So it has liabilities totalling US$848.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Teradata is worth US$4.21b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Teradata boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Teradata's EBIT shot up like bamboo after rain, gaining 89% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Teradata can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Teradata 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, Teradata actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Teradata does have more liabilities than liquid assets, it also has net cash of US$47.0m. And it impressed us with free cash flow of US$216m, being 347% of its EBIT. So we don't think Teradata's use of debt is risky. 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, we've discovered 5 warning signs for Teradata (2 make us uncomfortable!) 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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