Would Tidewater (NYSE:TDW) Be Better Off With Less 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 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, Tidewater Inc. (NYSE:TDW) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tidewater

What Is Tidewater's Net Debt?

The image below, which you can click on for greater detail, shows that Tidewater had debt of US$192.7m at the end of December 2020, a reduction from US$288.9m over a year. On the flip side, it has US$149.9m in cash leading to net debt of about US$42.8m.

A Look At Tidewater's Liabilities

We can see from the most recent balance sheet that Tidewater had liabilities of US$183.2m falling due within a year, and liabilities of US$244.7m due beyond that. On the other hand, it had cash of US$149.9m and US$174.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$103.3m.

This deficit isn't so bad because Tidewater is worth US$489.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tidewater can strengthen its balance sheet over time. 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, Tidewater made a loss at the EBIT level, and saw its revenue drop to US$397m, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Tidewater'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 US$118m 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 US$11m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Tidewater has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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