Gauging debt levels
Assessing a company’s debt levels gives us an indication of its financial health. Debt is a cheaper source of finance compared to equity. Interest on debt is tax deductible. However, assuming high levels of debt can have an adverse impact during uncertain economic times.
Debt levels rise in fiscal 2015
TJX Companies’ (TJX) debt-equity ratio increased to 0.4x in fiscal 2015 ending January 31, 2015, from 0.3x in the prior year. The company’s debt levels increased in fiscal 2015 due to the issuance of $750 million of seven-year notes with a 2.75% interest rate. The company used part of these proceeds to redeem $400 million of 4.2% notes due August 2015 and recorded a pretax charge of $16.8 million associated with early extinguishment of debt.
Less leveraged than department stores
TJX Companies’ debt-equity ratio is higher than its closest off-price rival Ross Stores (ROST) but lower than department stores. Department stores Macy’s (M), Nordstrom (JWN), and Kohl’s Corporation (KSS) have a debt-equity ratio of 1.4x, 1.3x, and 0.8x, respectively. One of the reasons for the lower debt levels is that TJX Companies has strong internally generated cash flows that support its growth plans.
The iShares Russell 1000 Growth ETF (IWF) has 0.4% exposure to TJX Companies.
We use net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio to assess the debt-servicing ability of a company. Net debt is computed as total debt minus cash and cash equivalents. The lower the net debt-to-EBITDA ratio, the higher the company’s ability to pay back its debt.
TJX Companies’s net debt-to-EBITDA ratio in fiscal 2015 was (0.26)x compared to (0.30)x in fiscal 2014. A negative net debt-to-EBITDA ratio in this case reflects that the company has more cash than debt.
The company has an A+ credit rating from Standard & Poor’s and is assigned A3 rating by Moody’s.