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 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. We note that Tidewater Midstream and Infrastructure Ltd. (TSE:TWM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tidewater Midstream and Infrastructure

What Is Tidewater Midstream and Infrastructure's Debt?

You can click the graphic below for the historical numbers, but it shows that Tidewater Midstream and Infrastructure had CA$500.3m of debt in June 2024, down from CA$882.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Tidewater Midstream and Infrastructure's Balance Sheet?

We can see from the most recent balance sheet that Tidewater Midstream and Infrastructure had liabilities of CA$516.2m falling due within a year, and liabilities of CA$426.7m due beyond that. Offsetting these obligations, it had cash of CA$1.90m as well as receivables valued at CA$183.0m due within 12 months. So its liabilities total CA$758.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$133.3m company, like a colossus towering over mere mortals. 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. 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 Tidewater Midstream and Infrastructure can strengthen its balance sheet over time. 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$2.0b, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

While Tidewater Midstream and Infrastructure'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$20m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CA$66m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Tidewater Midstream and Infrastructure .

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.