These 4 Measures Indicate That Toromont Industries (TSE:TIH) Is Using Debt Safely

Warren Buffett famously said, '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. As with many other companies Toromont Industries Ltd. (TSE:TIH) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Toromont Industries

How Much Debt Does Toromont Industries Carry?

The chart below, which you can click on for greater detail, shows that Toromont Industries had CA$646.7m in debt in June 2022; about the same as the year before. But on the other hand it also has CA$778.8m in cash, leading to a CA$132.1m net cash position.

How Strong Is Toromont Industries' Balance Sheet?

According to the last reported balance sheet, Toromont Industries had liabilities of CA$988.9m due within 12 months, and liabilities of CA$768.0m due beyond 12 months. Offsetting this, it had CA$778.8m in cash and CA$569.8m in receivables that were due within 12 months. So its liabilities total CA$408.3m more than the combination of its cash and short-term receivables.

Since publicly traded Toromont Industries shares are worth a total of CA$8.18b, 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, Toromont Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Toromont Industries grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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. Over the most recent three years, Toromont Industries recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Toromont Industries has CA$132.1m in net cash. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in CA$313m. So we don't think Toromont Industries's use of debt is risky. We'd be very excited to see if Toromont Industries insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.