We Think TWC Enterprises (TSE:TWC) Is Taking Some Risk With Its Debt

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.' 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. We can see that TWC Enterprises Limited (TSE:TWC) does use debt in its business. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TWC Enterprises

What Is TWC Enterprises's Debt?

You can click the graphic below for the historical numbers, but it shows that TWC Enterprises had CA$115.8m of debt in September 2020, down from CA$136.1m, one year before. But on the other hand it also has CA$148.5m in cash, leading to a CA$32.7m net cash position.

A Look At TWC Enterprises's Liabilities

We can see from the most recent balance sheet that TWC Enterprises had liabilities of CA$84.5m falling due within a year, and liabilities of CA$154.6m due beyond that. On the other hand, it had cash of CA$148.5m and CA$23.7m worth of receivables due within a year. So its liabilities total CA$66.9m more than the combination of its cash and short-term receivables.

Of course, TWC Enterprises has a market capitalization of CA$427.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TWC Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

Unfortunately, TWC Enterprises saw its EBIT slide 6.1% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TWC Enterprises'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TWC Enterprises may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, TWC Enterprises recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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$32.7m. So although we see some areas for improvement, we're not too worried about TWC Enterprises's balance sheet. 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. To that end, you should learn about the 2 warning signs we've spotted with TWC Enterprises (including 1 which is shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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