Is TasFoods (ASX:TFL) Using Debt Sensibly?

Warren Buffett famously said, '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. Importantly, TasFoods Limited (ASX:TFL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TasFoods

What Is TasFoods's Debt?

As you can see below, at the end of December 2020, TasFoods had AU$5.82m of debt, up from AU$5.27m a year ago. Click the image for more detail. However, it does have AU$7.64m in cash offsetting this, leading to net cash of AU$1.82m.

How Healthy Is TasFoods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TasFoods had liabilities of AU$11.2m due within 12 months and liabilities of AU$6.69m due beyond that. On the other hand, it had cash of AU$7.64m and AU$4.49m worth of receivables due within a year. So its liabilities total AU$5.78m more than the combination of its cash and short-term receivables.

Since publicly traded TasFoods shares are worth a total of AU$42.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TasFoods boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TasFoods 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.

In the last year TasFoods wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to AU$67m. With any luck the company will be able to grow its way to profitability.

So How Risky Is TasFoods?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that TasFoods had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$1.6m and booked a AU$6.4m accounting loss. Given it only has net cash of AU$1.82m, the company may need to raise more capital if it doesn't reach break-even soon. TasFoods's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example TasFoods has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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