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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Toromont Industries Ltd. (TSE:TIH) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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$647.8m in debt in December 2023; about the same as the year before. But it also has CA$1.04b in cash to offset that, meaning it has CA$393.0m net cash.

How Healthy Is Toromont Industries' Balance Sheet?

We can see from the most recent balance sheet that Toromont Industries had liabilities of CA$1.07b falling due within a year, and liabilities of CA$821.9m due beyond that. Offsetting these obligations, it had cash of CA$1.04b as well as receivables valued at CA$627.2m due within 12 months. So it has liabilities totalling CA$220.0m more than its cash and near-term receivables, combined.

Since publicly traded Toromont Industries shares are worth a total of CA$10.4b, it seems unlikely that this level of liabilities would be a major 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.

And we also note warmly that Toromont Industries grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Toromont Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Toromont Industries recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Toromont Industries's liabilities, but we can be reassured by the fact it has has net cash of CA$393.0m. On top of that, it increased its EBIT by 14% in the last twelve months. So is Toromont Industries's debt a risk? It doesn't seem so to us. 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.

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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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.