Does Thermal Energy International (CVE:TMG) Have A Healthy Balance Sheet?

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. We note that Thermal Energy International Inc. (CVE:TMG) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Thermal Energy International

What Is Thermal Energy International's Debt?

As you can see below, Thermal Energy International had CA$2.96m of debt at November 2021, down from CA$3.62m a year prior. However, it also had CA$2.55m in cash, and so its net debt is CA$408.2k.

How Strong Is Thermal Energy International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thermal Energy International had liabilities of CA$4.63m due within 12 months and liabilities of CA$3.39m due beyond that. Offsetting this, it had CA$2.55m in cash and CA$3.11m in receivables that were due within 12 months. So its liabilities total CA$2.36m more than the combination of its cash and short-term receivables.

Since publicly traded Thermal Energy International shares are worth a total of CA$17.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Thermal Energy International'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.

In the last year Thermal Energy International had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to CA$15m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Thermal Energy International produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$1.6m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.7m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Thermal Energy International is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.