Yahoo Finance Does Tootsie Roll Industries (NYSE:TR) Have A Healthy Balance Sheet?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Tootsie Roll Industries, Inc. (NYSE:TR) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Tootsie Roll Industries
How Much Debt Does Tootsie Roll Industries Carry?
As you can see below, Tootsie Roll Industries had US$8.58m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$145.5m in cash to offset that, meaning it has US$137.0m net cash.
How Strong Is Tootsie Roll Industries' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tootsie Roll Industries had liabilities of US$80.3m due within 12 months and liabilities of US$163.1m due beyond that. On the other hand, it had cash of US$145.5m and US$55.4m worth of receivables due within a year. So its liabilities total US$42.4m more than the combination of its cash and short-term receivables.
Having regard to Tootsie Roll Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.29b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Tootsie Roll Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Tootsie Roll Industries grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tootsie Roll Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tootsie Roll Industries 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, Tootsie Roll Industries generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Tootsie Roll Industries has US$137.0m in net cash. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$53m. So is Tootsie Roll Industries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tootsie Roll Industries you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
