Is Tapestry (NYSE:TPR) Using Too Much Debt?

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Simply Wall St

Sat, Apr 9, 2022, 7:48 AM 4 min read

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tapestry, Inc. (NYSE:TPR) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap 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.

See our latest analysis for Tapestry

What Is Tapestry's Debt?

The image below, which you can click on for greater detail, shows that Tapestry had debt of US$1.59b at the end of January 2022, a reduction from US$1.79b over a year. But it also has US$1.65b in cash to offset that, meaning it has US$58.6m net cash.

debt-equity-history-analysis — NYSE:TPR Debt to Equity History April 9th 2022

How Healthy Is Tapestry's Balance Sheet?

The latest balance sheet data shows that Tapestry had liabilities of US$1.84b due within a year, and liabilities of US$3.16b falling due after that. Offsetting these obligations, it had cash of US$1.65b as well as receivables valued at US$474.2m due within 12 months. So it has liabilities totalling US$2.88b more than its cash and near-term receivables, combined.

Tapestry has a market capitalization of US$8.78b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Tapestry boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Tapestry grew its EBIT by 127% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tapestry 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, a company can only pay off debt with cold hard cash, not accounting profits. While Tapestry 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. During the last three years, Tapestry produced sturdy free cash flow equating to 78% 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 Tapestry'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$58.6m. And it impressed us with its EBIT growth of 127% over the last year. So is Tapestry's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Tapestry 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.