Is Thermal Energy International (CVE:TMG) Using Debt Sensibly?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Thermal Energy International

How Much Debt Does Thermal Energy International Carry?

The image below, which you can click on for greater detail, shows that at February 2023 Thermal Energy International had debt of CA$3.49m, up from CA$2.72m in one year. However, it does have CA$4.26m in cash offsetting this, leading to net cash of CA$768.1k.

A Look At Thermal Energy International's Liabilities

Zooming in on the latest balance sheet data, we can see that Thermal Energy International had liabilities of CA$7.32m due within 12 months and liabilities of CA$3.85m due beyond that. Offsetting this, it had CA$4.26m in cash and CA$3.58m in receivables that were due within 12 months. So its liabilities total CA$3.33m more than the combination of its cash and short-term receivables.

Since publicly traded Thermal Energy International shares are worth a total of CA$20.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Thermal Energy International boasts net cash, so it's fair to say it does not have a heavy debt load! 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$17m, which is a gain of 14%, 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.

So How Risky Is Thermal Energy International?

While Thermal Energy International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$1.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 2 warning signs for Thermal Energy International (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.