We Think TeraGo (TSE:TGO) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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 can see that TeraGo Inc. (TSE:TGO) does use debt in its business. But the more important question is: how much risk is that debt creating?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TeraGo

How Much Debt Does TeraGo Carry?

As you can see below, TeraGo had CA$28.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$7.61m in cash offsetting this, leading to net debt of about CA$21.0m.

A Look At TeraGo's Liabilities

The latest balance sheet data shows that TeraGo had liabilities of CA$17.8m due within a year, and liabilities of CA$47.0m falling due after that. Offsetting these obligations, it had cash of CA$7.61m as well as receivables valued at CA$3.09m due within 12 months. So its liabilities total CA$54.1m more than the combination of its cash and short-term receivables.

TeraGo has a market capitalization of CA$105.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TeraGo can strengthen its balance sheet over time. 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 TeraGo had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to CA$47m. We would much prefer see growth.

Caveat Emptor

Importantly, TeraGo had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$2.1m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CA$8.2m into a profit. In the meantime, we consider the stock very 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 example, we've discovered 2 warning signs for TeraGo that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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