Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies The TJX Companies, Inc. (NYSE:TJX) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is TJX Companies's Net Debt?

As you can see below, TJX Companies had US$2.87b of debt, at November 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$4.72b in cash offsetting this, leading to net cash of US$1.85b.

How Strong Is TJX Companies' Balance Sheet?

According to the last reported balance sheet, TJX Companies had liabilities of US$12.0b due within 12 months, and liabilities of US$12.2b due beyond 12 months. On the other hand, it had cash of US$4.72b and US$717.0m worth of receivables due within a year. So it has liabilities totalling US$18.8b more than its cash and near-term receivables, combined.

Of course, TJX Companies has a titanic market capitalization of US$139.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, TJX Companies also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that TJX Companies grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TJX Companies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TJX Companies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, TJX Companies produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although TJX Companies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.85b. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think TJX Companies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for TJX Companies that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.