Is Toro Energy (ASX:TOE) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Toro Energy Limited (ASX:TOE) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Toro Energy

How Much Debt Does Toro Energy Carry?

As you can see below, Toro Energy had AU$10.0m of debt at June 2021, down from AU$15.0m a year prior. But it also has AU$12.4m in cash to offset that, meaning it has AU$2.39m net cash.

How Healthy Is Toro Energy's Balance Sheet?

We can see from the most recent balance sheet that Toro Energy had liabilities of AU$10.8m falling due within a year, and liabilities of AU$5.8k due beyond that. On the other hand, it had cash of AU$12.4m and AU$222.9k worth of receivables due within a year. So it can boast AU$1.76m more liquid assets than total liabilities.

This state of affairs indicates that Toro Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$113.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Toro Energy has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Toro Energy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, Toro Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Toro Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Toro Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$6.4m of cash and made a loss of AU$6.5m. However, it has net cash of AU$2.39m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with Toro Energy (including 1 which shouldn't be ignored) .

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.

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.

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