TSR (NASDAQ:TSRI) Seems To Use Debt Quite Sensibly

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. We can see that TSR, Inc. (NASDAQ:TSRI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TSR

What Is TSR's Debt?

You can click the graphic below for the historical numbers, but it shows that TSR had US$6.75m of debt in May 2021, down from US$7.16m, one year before. However, it does have US$7.42m in cash offsetting this, leading to net cash of US$664.6k.

A Look At TSR's Liabilities

Zooming in on the latest balance sheet data, we can see that TSR had liabilities of US$8.47m due within 12 months and liabilities of US$7.94m due beyond that. On the other hand, it had cash of US$7.42m and US$9.69m worth of receivables due within a year. So it can boast US$700.6k more liquid assets than total liabilities.

This short term liquidity is a sign that TSR could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TSR has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, TSR made a loss at the EBIT level, last year, but improved that to positive EBIT of US$147k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TSR's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TSR has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, TSR actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TSR has net cash of US$664.6k, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.2m, being 804% of its EBIT. So we don't have any problem with TSR's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with TSR (including 1 which doesn't sit too well with us) .

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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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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