Is Tremor International (LON:TRMR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Tremor International Ltd (LON:TRMR) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tremor International

What Is Tremor International's Net Debt?

As you can see below, at the end of September 2022, Tremor International had US$98.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$211.6m in cash, so it actually has US$113.2m net cash.

How Healthy Is Tremor International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tremor International had liabilities of US$301.6m due within 12 months and liabilities of US$122.9m due beyond that. Offsetting this, it had US$211.6m in cash and US$253.9m in receivables that were due within 12 months. So it can boast US$40.9m more liquid assets than total liabilities.

This surplus suggests that Tremor International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tremor International boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Tremor International's load is not too heavy, because its EBIT was down 21% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Tremor International 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tremor International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Tremor International actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tremor International has US$113.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$99m, being 182% of its EBIT. So we don't have any problem with Tremor International's use of debt. 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 2 warning signs for Tremor International that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.