Is Tucows (NASDAQ:TCX) Using Debt In A Risky Way?

January 10, 2023

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Tucows Inc. (NASDAQ:TCX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tucows

How Much Debt Does Tucows Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Tucows had US$299.4m of debt, an increase on US$150.0m, over one year. However, it does have US$32.5m in cash offsetting this, leading to net debt of about US$266.8m.

debt-equity-history-analysis — NasdaqCM:TCX Debt to Equity History January 10th 2023

A Look At Tucows' Liabilities

According to the last reported balance sheet, Tucows had liabilities of US$185.9m due within 12 months, and liabilities of US$354.0m due beyond 12 months. On the other hand, it had cash of US$32.5m and US$20.9m worth of receivables due within a year. So its liabilities total US$486.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$398.8m, we think shareholders really should watch Tucows's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tucows can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tucows reported revenue of US$325m, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Tucows produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$19m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$96m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tucows is showing 2 warning signs in our investment analysis , you should know about...

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.

Valuation is complex, but we're here to simplify it.

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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.