Is Tidewater Midstream and Infrastructure (TSE:TWM) Using Debt In A Risky Way?

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 note that Tidewater Midstream and Infrastructure Ltd. (TSE:TWM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tidewater Midstream and Infrastructure

What Is Tidewater Midstream and Infrastructure's Debt?

As you can see below, Tidewater Midstream and Infrastructure had CA$715.6m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CA$336.7m in cash, and so its net debt is CA$378.9m.

A Look At Tidewater Midstream and Infrastructure's Liabilities

Zooming in on the latest balance sheet data, we can see that Tidewater Midstream and Infrastructure had liabilities of CA$924.7m due within 12 months and liabilities of CA$338.4m due beyond that. Offsetting these obligations, it had cash of CA$336.7m as well as receivables valued at CA$147.8m due within 12 months. So its liabilities total CA$778.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CA$329.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Tidewater Midstream and Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tidewater Midstream and Infrastructure's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tidewater Midstream and Infrastructure made a loss at the EBIT level, and saw its revenue drop to CA$2.2b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tidewater Midstream and Infrastructure's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$35m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$155m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tidewater Midstream and Infrastructure is showing 1 warning sign in our investment analysis , you should know about...

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.