Does Teixeira Duarte (ELI:TDSA) Have A Healthy Balance Sheet?

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.' 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 Teixeira Duarte, S.A. (ELI:TDSA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Teixeira Duarte

How Much Debt Does Teixeira Duarte Carry?

You can click the graphic below for the historical numbers, but it shows that Teixeira Duarte had €786.6m of debt in June 2020, down from €844.9m, one year before. However, it also had €109.3m in cash, and so its net debt is €677.3m.

How Healthy Is Teixeira Duarte's Balance Sheet?

The latest balance sheet data shows that Teixeira Duarte had liabilities of €455.6m due within a year, and liabilities of €923.5m falling due after that. Offsetting these obligations, it had cash of €109.3m as well as receivables valued at €206.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.06b.

The deficiency here weighs heavily on the €42.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Teixeira Duarte would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Teixeira Duarte 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.

Over 12 months, Teixeira Duarte made a loss at the EBIT level, and saw its revenue drop to €769m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did Teixeira Duarte'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 €8.4m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 €3.3m in the last year. So we think buying this stock is risky. 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 3 warning signs for Teixeira Duarte (2 are a bit unpleasant) you should be aware of.

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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