Stock Analysis

Is Tornado Global Hydrovacs (CVE:TGH) Using Too Much Debt?

TSXV:TGH
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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 can see that Tornado Global Hydrovacs Ltd. (CVE:TGH) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does Tornado Global Hydrovacs Carry?

The chart below, which you can click on for greater detail, shows that Tornado Global Hydrovacs had CA$5.76m in debt in March 2022; about the same as the year before. However, it also had CA$790.0k in cash, and so its net debt is CA$4.97m.

debt-equity-history-analysis
TSXV:TGH Debt to Equity History May 30th 2022

How Healthy Is Tornado Global Hydrovacs' Balance Sheet?

According to the last reported balance sheet, Tornado Global Hydrovacs had liabilities of CA$9.54m due within 12 months, and liabilities of CA$4.77m due beyond 12 months. Offsetting these obligations, it had cash of CA$790.0k as well as receivables valued at CA$4.41m due within 12 months. So it has liabilities totalling CA$9.11m more than its cash and near-term receivables, combined.

Given Tornado Global Hydrovacs has a market capitalization of CA$64.7m, it's hard to believe these liabilities pose much threat. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tornado Global Hydrovacs reported revenue of CA$35m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Tornado Global Hydrovacs still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$2.1m. 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. However, it doesn't help that it burned through CA$1.8m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Tornado Global Hydrovacs you should be aware of, and 1 of them 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.

Valuation is complex, but we're helping make it simple.

Find out whether Tornado Global Hydrovacs is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.