Tootsie Roll Industries (NYSE:TR) Has A Rock Solid Balance Sheet

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.’ 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. Importantly, Tootsie Roll Industries, Inc. (NYSE:TR) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See 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$8.52m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$135.4m in cash, leading to a US$126.9m net cash position.

A Look At Tootsie Roll Industries’ Liabilities

According to the last reported balance sheet, Tootsie Roll Industries had liabilities of US$105.6m due within 12 months, and liabilities of US$156.7m due beyond 12 months. Offsetting this, it had US$135.4m in cash and US$84.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$42.8m.

Having regard to Tootsie Roll Industries’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$2.19b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, Tootsie Roll Industries also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Also positive, Tootsie Roll Industries grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Tootsie Roll Industries will need earnings to service that debt. 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 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$126.9m in net cash. And it impressed us with its EBIT growth of 24% over the last year. So we don’t think Tootsie Roll Industries’s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you’re interested in Tootsie Roll Industries, you may well want to click here to check an interactive graph of its earnings per share history.

If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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…