Here's Why Tornado Global Hydrovacs (CVE:TGH) Can Afford Some 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tornado Global Hydrovacs Ltd. (CVE:TGH) does have debt on its balance sheet. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tornado Global Hydrovacs

What Is Tornado Global Hydrovacs's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tornado Global Hydrovacs had CA$5.23m of debt in September 2021, down from CA$6.46m, one year before. However, it also had CA$1.78m in cash, and so its net debt is CA$3.45m.

A Look At Tornado Global Hydrovacs' Liabilities

We can see from the most recent balance sheet that Tornado Global Hydrovacs had liabilities of CA$7.68m falling due within a year, and liabilities of CA$5.46m due beyond that. Offsetting this, it had CA$1.78m in cash and CA$3.01m in receivables that were due within 12 months. So its liabilities total CA$8.35m more than the combination of its cash and short-term receivables.

Given Tornado Global Hydrovacs has a market capitalization of CA$53.2m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Tornado Global Hydrovacs's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Tornado Global Hydrovacs saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Tornado Global Hydrovacs had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$68k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$217k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Tornado Global Hydrovacs (1 shouldn't be ignored) 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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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.