Is Tenaz Energy (TSE:TNZ) Using Debt Sensibly?

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 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 Tenaz Energy Corp. (TSE:TNZ) makes use of debt. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Tenaz Energy's Debt?

As you can see below, at the end of December 2024, Tenaz Energy had CA$138.3m of debt, up from none a year ago. Click the image for more detail. But it also has CA$139.9m in cash to offset that, meaning it has CA$1.63m net cash.

How Strong Is Tenaz Energy's Balance Sheet?

We can see from the most recent balance sheet that Tenaz Energy had liabilities of CA$40.3m falling due within a year, and liabilities of CA$258.4m due beyond that. Offsetting these obligations, it had cash of CA$139.9m as well as receivables valued at CA$6.23m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$152.6m.

Tenaz Energy has a market capitalization of CA$348.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tenaz Energy 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 ultimately the future profitability of the business will decide if Tenaz Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

See our latest analysis for Tenaz Energy

Over 12 months, Tenaz Energy made a loss at the EBIT level, and saw its revenue drop to CA$58m, which is a fall of 3.8%. We would much prefer see growth.

So How Risky Is Tenaz Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Tenaz Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$15m of cash and made a loss of CA$7.7m. Given it only has net cash of CA$1.63m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Tenaz Energy insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.