Is Tide Water Oil (India) (NSE:TIDEWATER) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tide Water Oil Co. (India) Limited (NSE:TIDEWATER) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tide Water Oil (India)

How Much Debt Does Tide Water Oil (India) Carry?

You can click the graphic below for the historical numbers, but it shows that Tide Water Oil (India) had ₹166.0m of debt in March 2021, down from ₹346.8m, one year before. However, it does have ₹1.84b in cash offsetting this, leading to net cash of ₹1.68b.

How Strong Is Tide Water Oil (India)'s Balance Sheet?

According to the last reported balance sheet, Tide Water Oil (India) had liabilities of ₹2.51b due within 12 months, and liabilities of ₹532.4m due beyond 12 months. On the other hand, it had cash of ₹1.84b and ₹1.67b worth of receivables due within a year. So it actually has ₹479.3m more liquid assets than total liabilities.

Having regard to Tide Water Oil (India)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹46.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tide Water Oil (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Tide Water Oil (India) grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tide Water Oil (India) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tide Water Oil (India) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Tide Water Oil (India) recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tide Water Oil (India) has net cash of ₹1.68b, as well as more liquid assets than liabilities. And we liked the look of last year's 19% year-on-year EBIT growth. So is Tide Water Oil (India)'s debt a risk? It doesn't seem so to 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. To that end, you should be aware of the 2 warning signs we've spotted with Tide Water Oil (India) .

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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