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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tejon Ranch

What Is Tejon Ranch's Debt?

You can click the graphic below for the historical numbers, but it shows that Tejon Ranch had US$58.9m of debt in June 2021, down from US$66.0m, one year before. On the flip side, it has US$49.6m in cash leading to net debt of about US$9.28m.

How Healthy Is Tejon Ranch's Balance Sheet?

According to the last reported balance sheet, Tejon Ranch had liabilities of US$12.3m due within 12 months, and liabilities of US$77.3m due beyond 12 months. On the other hand, it had cash of US$49.6m and US$1.38m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$38.6m.

Given Tejon Ranch has a market capitalization of US$541.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tejon Ranch 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.

In the last year Tejon Ranch wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$50m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tejon Ranch had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$509k 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. Surprisingly, we note that it actually reported positive free cash flow of US$11m and a profit of US$2.0m. So one might argue that there's still a chance it can get things on the right track. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tejon Ranch you should know about.

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.

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.

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