Would Total Energy Services (TSE:TOT) Be Better Off With Less Debt?

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 Total Energy Services Inc. (TSE:TOT) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Total Energy Services

What Is Total Energy Services's Debt?

As you can see below, Total Energy Services had CA$190.5m of debt at December 2021, down from CA$233.1m a year prior. However, it does have CA$33.4m in cash offsetting this, leading to net debt of about CA$157.2m.

How Healthy Is Total Energy Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Total Energy Services had liabilities of CA$88.4m due within 12 months and liabilities of CA$231.7m due beyond that. Offsetting this, it had CA$33.4m in cash and CA$92.8m in receivables that were due within 12 months. So its liabilities total CA$194.0m more than the combination of its cash and short-term receivables.

Total Energy Services has a market capitalization of CA$332.3m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Total Energy Services'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.

Over 12 months, Total Energy Services reported revenue of CA$432m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Total Energy Services had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$9.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CA$360k into a profit. In the meantime, we consider the stock very risky. 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. For example, we've discovered 1 warning sign for Total Energy Services that you should be aware of before investing here.

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.

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