Stock Analysis

Is Taiga Building Products (TSE:TBL) A Risky Investment?

TSX:TBL
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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Taiga Building Products Ltd. (TSE:TBL) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Taiga Building Products

What Is Taiga Building Products's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Taiga Building Products had CA$20.1m of debt in September 2021, down from CA$42.1m, one year before. But on the other hand it also has CA$56.7m in cash, leading to a CA$36.6m net cash position.

debt-equity-history-analysis
TSX:TBL Debt to Equity History February 11th 2022

How Strong Is Taiga Building Products' Balance Sheet?

According to the last reported balance sheet, Taiga Building Products had liabilities of CA$221.1m due within 12 months, and liabilities of CA$117.0m due beyond 12 months. Offsetting this, it had CA$56.7m in cash and CA$179.2m in receivables that were due within 12 months. So its liabilities total CA$102.1m more than the combination of its cash and short-term receivables.

Taiga Building Products has a market capitalization of CA$329.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Taiga Building Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Taiga Building Products grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Taiga Building Products'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Taiga Building Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Taiga Building Products generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Taiga Building Products's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$36.6m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CA$113m. So we don't think Taiga Building Products's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Taiga Building Products that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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 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.