David Iben put it well when he said: ‘Volatility is not a risk we care about. What we are interested in is avoiding the permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, as debt overload can lead to ruin. Important, T-Mobile US, Inc. (NASDAQ:TMUS) carries debt. But the most important question is: how much risk does this debt create?
When is debt dangerous?
In general, debt only becomes a real problem when a company cannot pay it off easily, either by raising capital or with its own cash flow. Integral to capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it must raise new capital at a low price, thus permanently diluting shareholders. Of course, the advantage of debt is that it often represents free 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.
Check out our latest analysis of T-Mobile US
What is T-Mobile US’s net debt?
The chart below, which you can click on for more details, shows that T-Mobile US had $74.7 billion in debt as of March 2023; roughly the same as a year ago. However, it also had $4.54 billion in cash, and so its net debt is $70.2 billion.
How healthy is T-Mobile USA’s balance sheet?
The most recent balance sheet data shows that T-Mobile US had US$23.8 billion in liabilities maturing within a year and US$119.4 billion in liabilities maturing after that. On the other hand, it had $4.54 billion in cash and $9.84 billion in one-year receivables. So its liabilities amount to $128.9 billion more than the combination of cash and short-term receivables.
That deficit is sizable compared to its all-important $162.2 billion market capitalization, so it suggests shareholders should keep an eye on T-Mobile US’s use of debt. If its lenders require it to shore up the balance sheet, shareholders are likely to face severe dilution.
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings cover interest before interest and taxes (EBIT). expense (interest coverage). In this way, we take into account the absolute amount of the debt, as well as the interest rates paid for it.
T-Mobile US’s debt is 2.6 times EBITDA and EBIT covers interest expenses 4.1 times. Taken together this means that, while we would not like to see debt levels rise, we think it can handle its current leverage. On a lighter note, we note that T-Mobile US grew its EBIT by 26% last year. If it can sustain that kind of improvement, its debt load will begin to melt like glaciers in a warming world. There is no doubt that we learn more about debt from the balance sheet. But ultimately, future business profitability will decide whether T-Mobile US can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may adore accounting profits, lenders only accept cold hard cash. So it’s worth checking how much of this EBIT is supported by free cash flow. Over the past three years, T-Mobile US burned through a lot of cash. While this may be the result of growth spending, it makes debt much more risky.
Our point of view
We’d go so far as to say that T-Mobile US’s conversion of EBIT to free cash flow was disappointing. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. After considering all of the above factors together, it seems to us that T-Mobile US’s debt is making it a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer less debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, any company can contain risks that exist off the balance sheet. For example, we have discovered 3 warning signs for T-Mobile US which you should know about before investing here.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, then check out our list of net cash growth stocks without delay.
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This article from 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 into account your financial objectives or situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not include the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.
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