In this article, you will get all information regarding We think Target (NYSE:TGT) is taking risks with its debt

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest 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. Like many other companies Target company (NYSE:TGT) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Target

What is Target Debt?

You can click on the graph below for historical numbers, but it shows that in October 2022, Target had $16.6 billion in debt, an increase from $12.8 billion, year-over-year. . However, he also had $1.01 billion in cash, so his net debt is $15.6 billion.

NYSE: TGT Debt to Equity History December 25, 2022

How strong is Target’s balance sheet?

We can see from the most recent balance sheet that Target had liabilities of $23.8 billion due in one year, and liabilities of $20.8 billion beyond. In return, he had $1.01 billion in cash and $1.35 billion in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by $42.2 billion.

This shortfall is sizable relative to its very large market capitalization of US$65.9 billion, so it suggests shareholders watch Target’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Target’s net debt to EBITDA ratio of around 2.1 suggests only moderate debt utilization. And its towering EBIT of 10.8 times its interest expense means that the debt burden is as light as a peacock feather. Importantly, Target’s EBIT has fallen 45% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Target can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Target has produced strong free cash flow equivalent to 58% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Target’s EBIT growth rate was a real negative in this analysis, although the other factors we considered cast it in a significantly better light. For example, his coverage of interest was refreshing. When we consider all the factors discussed, it seems to us that Target is taking risks with its use of debt. While this debt may increase returns, we believe the company now has sufficient leverage. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 4 warning signs for the target (1 is concerning!) that you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Valuation is complex, but we help make it simple.

Find out if Target is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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.

We think Target (NYSE:TGT) is taking risks with its debt

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