Is Tubos Reunidos (BME:TRG) Using Too Much Debt?

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. We note that Tubos Reunidos, S.A. (BME:TRG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tubos Reunidos

How Much Debt Does Tubos Reunidos Carry?

As you can see below, Tubos Reunidos had €254.3m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had €21.8m in cash, and so its net debt is €232.5m.

How Strong Is Tubos Reunidos' Balance Sheet?

The latest balance sheet data shows that Tubos Reunidos had liabilities of €94.4m due within a year, and liabilities of €296.9m falling due after that. Offsetting these obligations, it had cash of €21.8m as well as receivables valued at €23.5m due within 12 months. So it has liabilities totalling €346.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €43.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tubos Reunidos would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Tubos Reunidos's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tubos Reunidos had a loss before interest and tax, and actually shrunk its revenue by 12%, to €264m. We would much prefer see growth.

Caveat Emptor

Not only did Tubos Reunidos'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 €38m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €74m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 3 warning signs for Tubos Reunidos (1 is a bit concerning!) 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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