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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that TeraGo Inc. (TSE:TGO) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TeraGo

How Much Debt Does TeraGo Carry?

As you can see below, TeraGo had CA$22.0m of debt at June 2021, down from CA$29.7m a year prior. However, because it has a cash reserve of CA$9.86m, its net debt is less, at about CA$12.1m.

How Healthy Is TeraGo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TeraGo had liabilities of CA$14.7m due within 12 months and liabilities of CA$40.2m due beyond that. On the other hand, it had cash of CA$9.86m and CA$2.70m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$42.4m.

While this might seem like a lot, it is not so bad since TeraGo has a market capitalization of CA$105.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TeraGo 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.

Over 12 months, TeraGo made a loss at the EBIT level, and saw its revenue drop to CA$44m, which is a fall of 6.7%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months TeraGo produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$3.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$9.4m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for TeraGo that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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