Is TPI Composites (NASDAQ:TPIC) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that TPI Composites, Inc. (NASDAQ:TPIC) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TPI Composites

How Much Debt Does TPI Composites Carry?

The image below, which you can click on for greater detail, shows that TPI Composites had debt of US$59.3m at the end of September 2022, a reduction from US$255.5m over a year. However, its balance sheet shows it holds US$129.1m in cash, so it actually has US$69.9m net cash.

How Healthy Is TPI Composites' Balance Sheet?

We can see from the most recent balance sheet that TPI Composites had liabilities of US$411.4m falling due within a year, and liabilities of US$150.1m due beyond that. Offsetting these obligations, it had cash of US$129.1m as well as receivables valued at US$395.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$36.6m.

Since publicly traded TPI Composites shares are worth a total of US$578.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, TPI Composites boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TPI Composites's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, TPI Composites made a loss at the EBIT level, and saw its revenue drop to US$1.7b, which is a fall of 6.8%. That's not what we would hope to see.

So How Risky Is TPI Composites?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year TPI Composites had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$101m of cash and made a loss of US$160m. While this does make the company a bit risky, it's important to remember it has net cash of US$69.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 TPI Composites that 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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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.