Tornos Holding (VTX:TOHN) Is Carrying A Fair Bit 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 Tornos Holding AG (VTX:TOHN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Tornos Holding

What Is Tornos Holding's Debt?

As you can see below, at the end of December 2020, Tornos Holding had CHF22.1m of debt, up from CHF15.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CHF17.3m, its net debt is less, at about CHF4.79m.

How Strong Is Tornos Holding's Balance Sheet?

We can see from the most recent balance sheet that Tornos Holding had liabilities of CHF28.1m falling due within a year, and liabilities of CHF22.1m due beyond that. Offsetting this, it had CHF17.3m in cash and CHF14.6m in receivables that were due within 12 months. So its liabilities total CHF18.3m more than the combination of its cash and short-term receivables.

Since publicly traded Tornos Holding shares are worth a total of CHF141.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Tornos Holding's ability to maintain a healthy balance sheet going forward. 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 Tornos Holding had a loss before interest and tax, and actually shrunk its revenue by 50%, to CHF103m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Tornos Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CHF31m at the EBIT level. 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. However, it doesn't help that it burned through CHF5.2m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Tornos Holding has 2 warning signs (and 1 which is concerning) we think you should know about.

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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