Stock Analysis

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

TSX:TCS
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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. Importantly, Tecsys Inc. (TSE:TCS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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

Check out our latest analysis for Tecsys

How Much Debt Does Tecsys Carry?

You can click the graphic below for the historical numbers, but it shows that Tecsys had CA$8.70m of debt in January 2022, down from CA$9.93m, one year before. But it also has CA$36.9m in cash to offset that, meaning it has CA$28.2m net cash.

debt-equity-history-analysis
TSX:TCS Debt to Equity History May 31st 2022

How Strong Is Tecsys' Balance Sheet?

The latest balance sheet data shows that Tecsys had liabilities of CA$44.7m due within a year, and liabilities of CA$16.6m falling due after that. On the other hand, it had cash of CA$36.9m and CA$32.1m worth of receivables due within a year. So it actually has CA$7.64m more liquid assets than total liabilities.

This state of affairs indicates that Tecsys' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$459.5m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Tecsys boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Tecsys's load is not too heavy, because its EBIT was down 23% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tecsys 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tecsys may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Tecsys actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Tecsys has CA$28.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CA$3.8m, being 129% of its EBIT. So we don't have any problem with Tecsys's use of debt. 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 example, we've discovered 1 warning sign for Tecsys that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Tecsys is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.