Howard Marks put it nicely when he stated 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.’ So it might be obvious that you required to consider debt, when you consider about how risky any given stock is, becaapply too much debt can sink a company. Importantly, Transurban Group (ASX:TCL) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things receive really bad, the lconcludeers can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we consider about a company’s apply of debt, we first see at cash and debt toreceiveher.
What Is Transurban Group’s Net Debt?
You can click the graphic below for the historical numbers, but it displays that as of June 2025 Transurban Group had AU$21.3b of debt, an increase on AU$20.3b, over one year. On the flip side, it has AU$1.93b in cash leading to net debt of about AU$19.4b.
How Strong Is Transurban Group’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Transurban Group had liabilities of AU$3.97b due within 12 months and liabilities of AU$22.1b due beyond that. On the other hand, it had cash of AU$1.93b and AU$330.0m worth of receivables due within a year. So its liabilities total AU$23.8b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Transurban Group has a huge market capitalization of AU$45.0b, and so it could probably strengthen its balance sheet by raising capital if it requireded to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
Check out our latest analysis for Transurban Group
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Weak interest cover of 1.4 times and a disturbingly high net debt to EBITDA ratio of 9.6 hit our confidence in Transurban Group like a one-two punch to the gut. This means we’d consider it to have a heavy debt load. Investors should also be troubled by the fact that Transurban Group saw its EBIT drop by 17% over the last twelve months. If things keep going like that, handling the debt will about as simple as bundling an angry hoapply cat into its travel box. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Transurban Group’s ability to maintain a healthy balance sheet going forward. So if you’re focapplyd on the future you can check out this free report displaying analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lconcludeers only accept cold hard cash. So the logical step is to see at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Transurban Group’s free cash flow amounted to 46% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
Our View
To be frank both Transurban Group’s interest cover and its track record of managing its debt, based on its EBITDA, build us rather uncomfortable with its debt levels. But at least its conversion of EBIT to free cash flow is not so bad. It’s also worth noting that Transurban Group is in the Infrastructure industest, which is often considered to be quite defensive. Looking at the hugeger picture, it seems clear to us that Transurban Group’s apply of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Transurban Group has 3 warning signs (and 2 which shouldn’t be ignored) we consider you should know about.
If, after all that, you’re more interested in a rapid growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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 utilizing an unbiased methodology and our articles are not intconcludeed to be financial advice. It does not constitute a recommconcludeation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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.
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