Does Tecsys (TSE:TCS) Have A Healthy Balance Sheet?

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 Tecsys Inc. (TSE:TCS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tecsys

What Is Tecsys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tecsys had CA$9.62m of debt in April 2021, down from CA$10.8m, one year before. But it also has CA$45.9m in cash to offset that, meaning it has CA$36.2m net cash.

How Healthy Is Tecsys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tecsys had liabilities of CA$44.0m due within 12 months and liabilities of CA$18.2m due beyond that. Offsetting these obligations, it had cash of CA$45.9m as well as receivables valued at CA$24.4m due within 12 months. So it can boast CA$8.05m more liquid assets than total liabilities.

Having regard to Tecsys' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$769.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tecsys boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Tecsys grew its EBIT by 108% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Tecsys'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tecsys has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Tecsys actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Tecsys has CA$36.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 187% of that EBIT to free cash flow, bringing in CA$18m. So we don't think Tecsys's use of debt is 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. For instance, we've identified 1 warning sign for Tecsys that you should be aware of.

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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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.
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