Is Twin Disc (NASDAQ:TWIN) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Twin Disc, Incorporated (NASDAQ:TWIN) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Twin Disc

How Much Debt Does Twin Disc Carry?

You can click the graphic below for the historical numbers, but it shows that Twin Disc had US$43.0m of debt in December 2020, down from US$53.2m, one year before. However, it does have US$11.8m in cash offsetting this, leading to net debt of about US$31.1m.

A Look At Twin Disc's Liabilities

We can see from the most recent balance sheet that Twin Disc had liabilities of US$75.1m falling due within a year, and liabilities of US$89.1m due beyond that. Offsetting these obligations, it had cash of US$11.8m as well as receivables valued at US$31.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$120.5m.

This deficit is considerable relative to its market capitalization of US$130.3m, so it does suggest shareholders should keep an eye on Twin Disc's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Twin Disc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Twin Disc made a loss at the EBIT level, and saw its revenue drop to US$223m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Twin Disc'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 US$5.9m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$35m. So to be blunt we do 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 2 warning signs we've spotted with Twin Disc .

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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