Is Thermal Energy International (CVE:TMG) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Thermal Energy International Inc. (CVE:TMG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Thermal Energy International

What Is Thermal Energy International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Thermal Energy International had CA$2.72m of debt in February 2022, down from CA$3.47m, one year before. However, it also had CA$2.29m in cash, and so its net debt is CA$428.3k.

How Healthy Is Thermal Energy International's Balance Sheet?

We can see from the most recent balance sheet that Thermal Energy International had liabilities of CA$5.50m falling due within a year, and liabilities of CA$3.08m due beyond that. Offsetting these obligations, it had cash of CA$2.29m as well as receivables valued at CA$3.06m due within 12 months. So its liabilities total CA$3.22m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Thermal Energy International has a market capitalization of CA$14.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, Thermal Energy International reported revenue of CA$15m, which is a gain of 5.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Thermal Energy International produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.2m at the EBIT level. 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$1.3m of cash over the last year. So in short it's a really risky stock. 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. For example Thermal Energy International has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.