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 Tootsie Roll Industries, Inc. (NYSE:TR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Tootsie Roll Industries Carry?
The chart below, which you can click on for greater detail, shows that Tootsie Roll Industries had US$8.58m in debt in September 2024; about the same as the year before. But on the other hand it also has US$163.2m in cash, leading to a US$154.6m net cash position.
How Strong Is Tootsie Roll Industries' Balance Sheet?
The latest balance sheet data shows that Tootsie Roll Industries had liabilities of US$95.7m due within a year, and liabilities of US$180.7m falling due after that. Offsetting this, it had US$163.2m in cash and US$77.2m in receivables that were due within 12 months. So it has liabilities totalling US$35.9m more than its cash and near-term receivables, combined.
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$2.34b 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!
Tootsie Roll Industries's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is Tootsie Roll Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tootsie Roll Industries 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 most recent three years, Tootsie Roll Industries recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
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$154.6m in net cash. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in US$104m. So is Tootsie Roll Industries's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Tootsie Roll Industries's earnings per share history for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
