These 4 Measures Indicate That Trican Well Service (TSE:TCW) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Trican Well Service Ltd. (TSE:TCW) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Trican Well Service

What Is Trican Well Service's Net Debt?

As you can see below, at the end of June 2022, Trican Well Service had CA$29.8m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$58.3m in cash, so it actually has CA$28.5m net cash.

How Strong Is Trican Well Service's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trican Well Service had liabilities of CA$125.3m due within 12 months and liabilities of CA$18.7m due beyond that. On the other hand, it had cash of CA$58.3m and CA$156.4m worth of receivables due within a year. So it can boast CA$70.7m more liquid assets than total liabilities.

This surplus suggests that Trican Well Service has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Trican Well Service boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Trican Well Service made a loss at the EBIT level, last year, it was also good to see that it generated CA$35m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Trican Well Service's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Trican Well Service 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 last year, Trican Well Service recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Trican Well Service has CA$28.5m in net cash and a decent-looking balance sheet. So we are not troubled with Trican Well Service's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Trican Well Service insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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. 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.