Tesserent (ASX:TNT) Is Making Moderate Use Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tesserent Limited (ASX:TNT) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tesserent

What Is Tesserent's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tesserent had AU$9.91m of debt, an increase on AU$3.45m, over one year. On the flip side, it has AU$7.98m in cash leading to net debt of about AU$1.93m.

How Strong Is Tesserent's Balance Sheet?

The latest balance sheet data shows that Tesserent had liabilities of AU$32.1m due within a year, and liabilities of AU$20.4m falling due after that. Offsetting this, it had AU$7.98m in cash and AU$18.0m in receivables that were due within 12 months. So it has liabilities totalling AU$26.5m more than its cash and near-term receivables, combined.

Of course, Tesserent has a market capitalization of AU$237.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Tesserent has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tesserent's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tesserent reported revenue of AU$44m, which is a gain of 459%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

While we can certainly appreciate Tesserent's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at AU$5.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$3.6m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 instance, we've identified 3 warning signs for Tesserent (2 are a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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