Ternium (NYSE:TX) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ternium S.A. (NYSE:TX) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Ternium

How Much Debt Does Ternium Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Ternium had US$2.10b of debt, an increase on US$880.3m, over one year. But on the other hand it also has US$4.06b in cash, leading to a US$1.97b net cash position.

How Strong Is Ternium's Balance Sheet?

According to the last reported balance sheet, Ternium had liabilities of US$3.78b due within 12 months, and liabilities of US$3.34b due beyond 12 months. Offsetting this, it had US$4.06b in cash and US$3.40b in receivables that were due within 12 months. So it actually has US$352.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Ternium could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ternium has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Ternium grew its EBIT by 101% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Ternium 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. While Ternium 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. In the last three years, Ternium's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ternium has net cash of US$1.97b, as well as more liquid assets than liabilities. And we liked the look of last year's 101% year-on-year EBIT growth. So we don't think Ternium's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Ternium (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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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.