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Does Teradyne (NASDAQ:TER) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Teradyne, Inc. (NASDAQ:TER) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Teradyne

What Is Teradyne's Debt?

As you can see below, Teradyne had US$95.9m of debt at April 2022, down from US$367.9m a year prior. However, it does have US$1.08b in cash offsetting this, leading to net cash of US$980.7m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Teradyne's Balance Sheet?

We can see from the most recent balance sheet that Teradyne had liabilities of US$712.2m falling due within a year, and liabilities of US$422.4m due beyond that. Offsetting these obligations, it had cash of US$1.08b as well as receivables valued at US$546.9m due within 12 months. So it can boast US$488.9m more liquid assets than total liabilities.

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This surplus suggests that Teradyne has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Teradyne boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Teradyne has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Teradyne can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Teradyne has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Teradyne recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Teradyne has US$980.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$930m, being 76% of its EBIT. So we don't think Teradyne's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Teradyne's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.