Here's Why Toromont Industries (TSE:TIH) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Toromont Industries Ltd. (TSE:TIH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Toromont Industries in our free report.

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. 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. 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.

How Much Debt Does Toromont Industries Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Toromont Industries had debt of CA$945.6m, up from CA$648.0m in one year. But on the other hand it also has CA$977.5m in cash, leading to a CA$31.8m net cash position.

A Look At Toromont Industries' Liabilities

We can see from the most recent balance sheet that Toromont Industries had liabilities of CA$1.14b falling due within a year, and liabilities of CA$1.07b due beyond that. On the other hand, it had cash of CA$977.5m and CA$647.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$579.4m.

Given Toromont Industries has a market capitalization of CA$9.54b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Toromont Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Toromont Industries

But the other side of the story is that Toromont Industries saw its EBIT decline by 3.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Toromont Industries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Toromont Industries 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. Looking at the most recent three years, Toromont Industries recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Toromont Industries has CA$31.8m in net cash. So we don't have any problem with Toromont Industries's use of debt. We'd be motivated to research the stock further if we found out that Toromont Industries insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

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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.