Termo-Rex (WSE:TRR) Is Carrying A Fair Bit Of Debt

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. We note that Termo-Rex S.A. (WSE:TRR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Termo-Rex

What Is Termo-Rex's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Termo-Rex had zł5.70m of debt, an increase on zł2.62m, over one year. On the flip side, it has zł1.26m in cash leading to net debt of about zł4.44m.

How Strong Is Termo-Rex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Termo-Rex had liabilities of zł12.0m due within 12 months and liabilities of zł6.47m due beyond that. On the other hand, it had cash of zł1.26m and zł16.4m worth of receivables due within a year. So it has liabilities totalling zł794.0k more than its cash and near-term receivables, combined.

Having regard to Termo-Rex's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the zł124.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Termo-Rex will need earnings to service that debt. 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 Termo-Rex had a loss before interest and tax, and actually shrunk its revenue by 21%, to zł48m. That makes us nervous, to say the least.

Caveat Emptor

While Termo-Rex's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost zł1.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł3.7m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with Termo-Rex .

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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