Is Tornado Global Hydrovacs (CVE:TGH) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tornado Global Hydrovacs Ltd. (CVE:TGH) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tornado Global Hydrovacs

What Is Tornado Global Hydrovacs's Debt?

As you can see below, at the end of September 2022, Tornado Global Hydrovacs had CA$7.77m of debt, up from CA$5.23m a year ago. Click the image for more detail. However, it does have CA$721.0k in cash offsetting this, leading to net debt of about CA$7.05m.

How Healthy Is Tornado Global Hydrovacs' Balance Sheet?

The latest balance sheet data shows that Tornado Global Hydrovacs had liabilities of CA$13.7m due within a year, and liabilities of CA$4.63m falling due after that. Offsetting this, it had CA$721.0k in cash and CA$5.79m in receivables that were due within 12 months. So its liabilities total CA$11.8m more than the combination of its cash and short-term receivables.

Of course, Tornado Global Hydrovacs has a market capitalization of CA$61.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

In the last year Tornado Global Hydrovacs wasn't profitable at an EBIT level, but managed to grow its revenue by 68%, to CA$48m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Tornado Global Hydrovacs still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$334k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$7.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Tornado Global Hydrovacs (including 2 which can't be ignored) .

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.