Does TransAlta (TSE:TA) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, TransAlta Corporation (TSE:TA) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TransAlta

What Is TransAlta's Net Debt?

As you can see below, at the end of March 2021, TransAlta had CA$3.81b of debt, up from CA$3.37b a year ago. Click the image for more detail. However, because it has a cash reserve of CA$648.0m, its net debt is less, at about CA$3.16b.

How Strong Is TransAlta's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TransAlta had liabilities of CA$936.0m due within 12 months and liabilities of CA$5.11b due beyond that. On the other hand, it had cash of CA$648.0m and CA$568.0m worth of receivables due within a year. So it has liabilities totalling CA$4.83b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$3.03b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TransAlta would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TransAlta 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, TransAlta made a loss at the EBIT level, and saw its revenue drop to CA$2.1b, which is a fall of 7.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months TransAlta produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$33m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$393m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 1 warning sign for TransAlta that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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