Would Titan Mining (TSE:TI) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Titan Mining Corporation (TSE:TI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Titan Mining

What Is Titan Mining's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Titan Mining had debt of US$37.7m, up from US$31.6m in one year. On the flip side, it has US$7.02m in cash leading to net debt of about US$30.7m.

How Healthy Is Titan Mining's Balance Sheet?

We can see from the most recent balance sheet that Titan Mining had liabilities of US$38.8m falling due within a year, and liabilities of US$20.3m due beyond that. Offsetting these obligations, it had cash of US$7.02m as well as receivables valued at US$1.45m due within 12 months. So its liabilities total US$50.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$76.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Titan Mining'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.

In the last year Titan Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 1,126%, to US$20m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Titan Mining managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$12m. 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. Another cause for caution is that is bled US$5.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for Titan Mining (1 doesn't sit too well with us) you should be aware of.

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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