David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Ternium S.A. (NYSE:TX) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View 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 Ternium had US$1.09b of debt in June 2022, down from US$1.57b, one year before. However, its balance sheet shows it holds US$2.06b in cash, so it actually has US$970.0m net cash.
NYSE:TX Debt to Equity History September 12th 2022A Look At Ternium's Liabilities
According to the last reported balance sheet, Ternium had liabilities of US$2.58b due within 12 months, and liabilities of US$1.50b due beyond 12 months. On the other hand, it had cash of US$2.06b and US$2.44b worth of receivables due within a year. So it actually has US$413.0m 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. Succinctly put, Ternium boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Ternium grew its EBIT by 71% 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 Ternium'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ternium 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. Looking at the most recent three years, Ternium recorded free cash flow of 46% of its EBIT, which is weaker 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$970.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 71% year-on-year EBIT growth. So we don't think Ternium's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Ternium (1 can't be ignored) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.