Is Tsakos Energy Navigation (NYSE:TNP) Using Debt In A Risky Way?

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.' 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 Tsakos Energy Navigation Limited (NYSE:TNP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tsakos Energy Navigation

How Much Debt Does Tsakos Energy Navigation Carry?

The chart below, which you can click on for greater detail, shows that Tsakos Energy Navigation had US$1.50b in debt in March 2022; about the same as the year before. However, it does have US$143.0m in cash offsetting this, leading to net debt of about US$1.36b.

A Look At Tsakos Energy Navigation's Liabilities

According to the last reported balance sheet, Tsakos Energy Navigation had liabilities of US$332.1m due within 12 months, and liabilities of US$1.72b due beyond 12 months. Offsetting this, it had US$143.0m in cash and US$58.0m in receivables that were due within 12 months. So its liabilities total US$1.85b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$396.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tsakos Energy Navigation would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tsakos Energy Navigation'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.

In the last year Tsakos Energy Navigation had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to US$557m. That's not what we would hope to see.

Caveat Emptor

Importantly, Tsakos Energy Navigation had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$20m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$8.1m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 example, we've discovered 2 warning signs for Tsakos Energy Navigation that you should be aware of before investing here.

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.