Tecsys (TSE:TCS) Could Easily Take On More 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 can see that Tecsys Inc. (TSE:TCS) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tecsys

What Is Tecsys's Debt?

The image below, which you can click on for greater detail, shows that Tecsys had debt of CA$9.93m at the end of January 2021, a reduction from CA$11.1m over a year. However, its balance sheet shows it holds CA$39.6m in cash, so it actually has CA$29.7m net cash.

How Strong Is Tecsys' Balance Sheet?

According to the last reported balance sheet, Tecsys had liabilities of CA$40.7m due within 12 months, and liabilities of CA$18.9m due beyond 12 months. Offsetting these obligations, it had cash of CA$39.6m as well as receivables valued at CA$25.1m due within 12 months. So it actually has CA$5.12m 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 while it's hard to imagine that the CA$778.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Tecsys has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Tecsys has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. 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 Tecsys'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.

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. Over the last three years, Tecsys actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tecsys has net cash of CA$29.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CA$16m, being 164% of its EBIT. So we don't think Tecsys's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Tecsys has 3 warning signs we think 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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