We think Tennant (NYSE:TNC) can stay on top of its debt

Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Tennant Company (NYSE:TNC) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

What is Tennant’s net debt?

You can click on the chart below for historical numbers, but it shows Tennant had $268.3 million in debt as of September 2021, up from $323.5 million a year prior. However, he has $140.6 million in cash to offset this, resulting in a net debt of approximately $127.7 million.

NYSE: TNC Debt to Equity History February 3, 2022

A look at Tennant’s responsibilities

Zooming in on the latest balance sheet data, we can see that Tennant had liabilities of US$276.2 million due within 12 months and liabilities of US$347.8 million due beyond. On the other hand, it had a cash position of 140.6 million dollars and 198.4 million dollars of receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and receivables (current) of US$285.0 million.

Tennant has a market capitalization of US$1.41 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.

Tennant has net debt of just 0.92 times EBITDA, indicating that it is certainly not an imprudent borrower. And this view is supported by strong interest coverage, with EBIT amounting to 8.0 times interest expense over the past year. But the flip side is that Tennant has seen its EBIT drop 5.6% over the past year. This type of decline, if it continues, will obviously make the debt more difficult to manage. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Tennant 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, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Tennant has generated free cash flow of a very strong 89% of EBIT, more than expected. This puts him in a very strong position to pay off the debt.

Our point of view

Fortunately, Tennant’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. But, on a darker note, we are a bit concerned about its EBIT growth rate. All told, it looks like Tennant can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew Tennant insiders were buying stock: if you’re on the same page, you can find out if insiders are buying by clicking this link. .

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

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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