Does TWC Enterprises (TSE:TWC) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 TWC Enterprises Limited (TSE:TWC) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TWC Enterprises

What Is TWC Enterprises's Net Debt?

The image below, which you can click on for greater detail, shows that TWC Enterprises had debt of CA$80.6m at the end of June 2023, a reduction from CA$100.7m over a year. But on the other hand it also has CA$167.0m in cash, leading to a CA$86.5m net cash position.

How Healthy Is TWC Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TWC Enterprises had liabilities of CA$130.2m due within 12 months and liabilities of CA$103.5m due beyond that. Offsetting this, it had CA$167.0m in cash and CA$24.5m in receivables that were due within 12 months. So it has liabilities totalling CA$42.1m more than its cash and near-term receivables, combined.

Of course, TWC Enterprises has a market capitalization of CA$380.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, TWC Enterprises also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, TWC Enterprises's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since TWC Enterprises will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TWC Enterprises has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, TWC Enterprises recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although TWC Enterprises's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$86.5m. And it impressed us with free cash flow of -CA$16m, being 69% of its EBIT. So we don't have any problem with TWC Enterprises's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with TWC Enterprises .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.