Is Tejon Ranch (NYSE:TRC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Tejon Ranch Co. (NYSE:TRC) makes use of debt. But the real question is whether this debt is making the company risky.

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

Check out our latest analysis for Tejon Ranch

What Is Tejon Ranch's Net Debt?

As you can see below, Tejon Ranch had US$47.9m of debt at December 2023, down from US$49.9m a year prior. But on the other hand it also has US$64.5m in cash, leading to a US$16.5m net cash position.

How Strong Is Tejon Ranch's Balance Sheet?

The latest balance sheet data shows that Tejon Ranch had liabilities of US$11.6m due within a year, and liabilities of US$82.9m falling due after that. On the other hand, it had cash of US$64.5m and US$8.63m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$21.3m.

Of course, Tejon Ranch has a market capitalization of US$443.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Tejon Ranch also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tejon Ranch'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, Tejon Ranch made a loss at the EBIT level, and saw its revenue drop to US$45m, which is a fall of 44%. To be frank that doesn't bode well.

So How Risky Is Tejon Ranch?

Although Tejon Ranch had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$3.3m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 instance, we've identified 1 warning sign for Tejon Ranch that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.