Here's Why TETRA Technologies (NYSE:TTI) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies TETRA Technologies, Inc. (NYSE:TTI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TETRA Technologies

What Is TETRA Technologies's Debt?

As you can see below, TETRA Technologies had US$171.2m of debt at March 2021, down from US$845.8m a year prior. However, it also had US$54.2m in cash, and so its net debt is US$117.0m.

A Look At TETRA Technologies' Liabilities

According to the last reported balance sheet, TETRA Technologies had liabilities of US$83.2m due within 12 months, and liabilities of US$221.5m due beyond 12 months. Offsetting this, it had US$54.2m in cash and US$62.4m in receivables that were due within 12 months. So its liabilities total US$188.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TETRA Technologies has a market capitalization of US$464.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 TETRA Technologies'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, TETRA Technologies made a loss at the EBIT level, and saw its revenue drop to US$322m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While TETRA Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$30m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$3.1m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for TETRA Technologies you should know about.

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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