Does Total Energy Services (TSE:TOT) Have A Healthy Balance Sheet?

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.' 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. Importantly, Total Energy Services Inc. (TSE:TOT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, 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.

Check out our latest analysis for Total Energy Services

How Much Debt Does Total Energy Services Carry?

As you can see below, Total Energy Services had CA$233.1m of debt at December 2020, down from CA$277.9m a year prior. However, it does have CA$23.0m in cash offsetting this, leading to net debt of about CA$210.1m.

A Look At Total Energy Services' Liabilities

According to the last reported balance sheet, Total Energy Services had liabilities of CA$61.7m due within 12 months, and liabilities of CA$276.8m due beyond 12 months. Offsetting this, it had CA$23.0m in cash and CA$74.7m in receivables that were due within 12 months. So it has liabilities totalling CA$240.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$183.5m, we think shareholders really should watch Total Energy Services's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Total Energy Services 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.

Over 12 months, Total Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$366m, which is a fall of 52%. To be frank that doesn't bode well.

Caveat Emptor

While Total Energy Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$37m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$30m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Total Energy Services .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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