Target (NYSE:TGT) appears to be using debt sparingly

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that Target company (NYSE:TGT) has debt on its balance sheet. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

What is Target’s net debt?

The graph below, which you can click on for more details, shows that Target had $12.8 billion in debt as of October 2021; about the same as the previous year. However, since it has a cash reserve of $5.77 billion, its net debt is less, at around $7.00 billion.

NYSE: TGT Debt to Equity History January 14, 2022

How strong is Target’s balance sheet?

The latest balance sheet data shows Target had $23.4 billion in liabilities due within the year, and $17.3 billion in liabilities due thereafter. In return, he had $5.77 billion in cash and $1.14 billion in receivables due within 12 months. Thus, its liabilities total $33.7 billion more than the combination of its cash and short-term receivables.

Target has a very large market capitalization of US$108.2 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.

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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Target’s net debt is only 0.63 times its EBITDA. And its EBIT covers its interest charges 20.3 times. So we’re pretty relaxed about his super-conservative use of debt. On top of that, Target has grown its EBIT by 39% 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 Target can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Target has delivered free cash flow worth 86% of its EBIT, which is higher than what we would typically expect. This positions him well to pay off debt if desired.

Our point of view

Target’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. Overall, we don’t think Target is taking bad risks, as its leverage looks modest. The balance sheet therefore seems rather healthy to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 target warning sign which you should be aware of before investing here.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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