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. We note that Teradata Corporation (NYSE:TDC) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company’s debt levels is to consider its cash and debt together.
What Is Teradata’s Debt?
The chart below, which you can click on for greater detail, shows that Teradata had US$511.0m in debt in June 2019; about the same as the year before. But on the other hand it also has US$635.0m in cash, leading to a US$124.0m net cash position.
A Look At Teradata’s Liabilities
Zooming in on the latest balance sheet data, we can see that Teradata had liabilities of US$865.0m due within 12 months and liabilities of US$891.0m due beyond that. On the other hand, it had cash of US$635.0m and US$383.0m worth of receivables due within a year. So its liabilities total US$738.0m more than the combination of its cash and short-term receivables.
Of course, Teradata has a market capitalization of US$3.80b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Teradata also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Notably Teradata’s EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Teradata’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 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Teradata’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$124.0m. And it impressed us with free cash flow of US$51m, being 167% of its EBIT. So we are not troubled with Teradata’s debt use. We’d be motivated to research the stock further if we found out that Teradata insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
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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