TimkenSteel（纽约证券交易所代码：TMST）是否拥有健康的资产负债表？

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that TimkenSteel Corporation (NYSE:TMST) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TimkenSteel

What Is TimkenSteel's Net Debt?

The image below, which you can click on for greater detail, shows that TimkenSteel had debt of US$13.1m at the end of June 2023, a reduction from US$20.4m over a year. But on the other hand it also has US$221.9m in cash, leading to a US$208.8m net cash position.

How Strong Is TimkenSteel's Balance Sheet?

The latest balance sheet data shows that TimkenSteel had liabilities of US$219.8m due within a year, and liabilities of US$216.9m falling due after that. Offsetting this, it had US$221.9m in cash and US$133.3m in receivables that were due within 12 months. So its liabilities total US$81.5m more than the combination of its cash and short-term receivables.

Of course, TimkenSteel has a market capitalization of US$854.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TimkenSteel boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that TimkenSteel's load is not too heavy, because its EBIT was down 100% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TimkenSteel's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While TimkenSteel 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 last three years, TimkenSteel actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about TimkenSteel's liabilities, but we can be reassured by the fact it has has net cash of US$208.8m. And it impressed us with free cash flow of US$58m, being 112% of its EBIT. So we are not troubled with TimkenSteel's debt use. Even though TimkenSteel lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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 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.