Here’s Why TTM Technologies (NASDAQ: TTMI) Can Responsibly Manage Debt


Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that TTM Technologies, Inc. (NASDAQ: TTMI) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for TTM Technologies

What is the debt of TTM Technologies?

You can click on the graph below for historical numbers, but it shows TTM Technologies had $ 934.3 million in debt in September 2021, up from $ 1.11 billion a year earlier. On the other hand, it has $ 529.8 million in cash, resulting in net debt of around $ 404.5 million.

NasdaqGS: TTMI Debt to Equity History January 5, 2022

How strong is TTM Technologies’ balance sheet?

Zooming in on the latest balance sheet data, we can see that TTM Technologies had a liability of US $ 567.4 million due within 12 months and a liability of US $ 1.01 billion beyond. On the other hand, it had US $ 529.8 million in cash and US $ 714.0 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 337.2 million.

TTM Technologies has a market capitalization of US $ 1.61 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

TTM Technologies’ net debt stands at a very reasonable level of 1.6 times its EBITDA, while its EBIT only covered its interest expense 2.7 times last year. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. TTM Technologies increased its EBIT by 5.7% over the past year. While it hardly strikes us, it is a bright spot when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether TTM Technologies can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, TTM Technologies has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

Our point of view

Fortunately, TTM Technologies’ impressive conversion of EBIT to free cash flow means that it has the upper hand over its debt. But the hard truth is that we are concerned about its coverage of interest. Looking at all of the above factors together, it seems to us that TTM Technologies can manage its debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. 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 off the balance sheet. For example, we have identified 1 warning sign for TTM Technologies that you need to be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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