Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies TD SYNNEX Company (NYSE:SNX) uses debt. But the more important question is: what risk does this debt create?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for TD SYNNEX
What is TD SYNNEX’s net debt?
The image below, which you can click on for more details, shows that in February 2022, TD SYNNEX had US$5.07 billion in debt, up from US$1.74 billion in one year. However, he also had $510.2 million in cash, so his net debt is $4.56 billion.
How strong is TD SYNNEX’s balance sheet?
According to the last published balance sheet, TD SYNNEX had liabilities of US$15.2 billion due within 12 months and liabilities of US$5.49 billion due beyond 12 months. As compensation for these obligations, it had cash of US$510.2 million as well as receivables valued at US$9.84 billion due within 12 months. Thus, its liabilities total $10.4 billion more than the combination of its cash and short-term receivables.
Given that this deficit is actually higher than the company’s market capitalization of US$8.70 billion, we think shareholders really should be watching TD SYNNEX’s debt levels, like a parent watching their child riding a bicycle for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
TD SYNNEX’s debt is 3.8 times its EBITDA, and its EBIT covers its interest expense 5.3 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Importantly, TD SYNNEX has grown its EBIT by 51% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether TD SYNNEX can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, TD SYNNEX has recorded free cash flow representing 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
On the balance sheet, the most significant positive for TD SYNNEX is the fact that it looks capable of growing its EBIT with confidence. However, our other observations were not so encouraging. To be precise, it seems about as good at keeping your total passive down as wet socks are at keeping your feet warm. Looking at all this data, we feel a bit cautious about TD SYNNEX’s debt levels. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 5 warning signs for TD SYNNEX (2 of which are significant!) that you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.