We Think Tower Investments (WSE:TOW) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Tower Investments S.A. (WSE:TOW) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tower Investments

What Is Tower Investments's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Tower Investments had zł29.7m of debt, an increase on zł24.5m, over one year. However, because it has a cash reserve of zł8.20m, its net debt is less, at about zł21.5m.

A Look At Tower Investments' Liabilities

Zooming in on the latest balance sheet data, we can see that Tower Investments had liabilities of zł19.3m due within 12 months and liabilities of zł29.2m due beyond that. On the other hand, it had cash of zł8.20m and zł19.9m worth of receivables due within a year. So its liabilities total zł20.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of zł29.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tower Investments 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.

Over 12 months, Tower Investments made a loss at the EBIT level, and saw its revenue drop to zł35m, which is a fall of 10.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Tower Investments had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost zł2.7m 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. For example, we would not want to see a repeat of last year's loss of zł5.2m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Tower Investments , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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