These 4 Measures Indicate That Trematon Capital Investments (JSE:TMT) Is Using Debt Reasonably Well

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. Importantly, Trematon Capital Investments Limited (JSE:TMT) does carry debt. But is this debt a concern to shareholders?

We've discovered 3 warning signs about Trematon Capital Investments. View them for free.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Trematon Capital Investments's Net Debt?

As you can see below, Trematon Capital Investments had R162.1m of debt at February 2025, down from R1.12b a year prior. But it also has R374.7m in cash to offset that, meaning it has R212.6m net cash.

How Healthy Is Trematon Capital Investments' Balance Sheet?

We can see from the most recent balance sheet that Trematon Capital Investments had liabilities of R205.6m falling due within a year, and liabilities of R162.1m due beyond that. On the other hand, it had cash of R374.7m and R12.5m worth of receivables due within a year. So it actually has R19.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Trematon Capital Investments could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Trematon Capital Investments boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Trematon Capital Investments

It is well worth noting that Trematon Capital Investments's EBIT shot up like bamboo after rain, gaining 97% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Trematon Capital Investments will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Trematon Capital Investments 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. Over the most recent three years, Trematon Capital Investments recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Trematon Capital Investments has net cash of R212.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 97% over the last year. So we don't have any problem with Trematon Capital Investments's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Trematon Capital Investments is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.