Is TJX Companies (NYSE:TJX) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 The TJX Companies, Inc. (NYSE:TJX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TJX Companies

What Is TJX Companies's Net Debt?

The image below, which you can click on for greater detail, shows that TJX Companies had debt of US$3.36b at the end of April 2022, a reduction from US$5.33b over a year. But it also has US$4.30b in cash to offset that, meaning it has US$939.3m net cash.

How Strong Is TJX Companies' Balance Sheet?

According to the last reported balance sheet, TJX Companies had liabilities of US$10.0b due within 12 months, and liabilities of US$12.1b due beyond 12 months. On the other hand, it had cash of US$4.30b and US$1.20b worth of receivables due within a year. So its liabilities total US$16.6b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TJX Companies has a huge market capitalization of US$68.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, TJX Companies boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that TJX Companies grew its EBIT by 127% 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 TJX Companies 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, a company can only pay off debt with cold hard cash, not accounting profits. TJX Companies 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. Over the last three years, TJX Companies recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While TJX Companies does have more liabilities than liquid assets, it also has net cash of US$939.3m. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in US$1.7b. So is TJX Companies's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TJX Companies is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.