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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. We can see that Trican Well Service Ltd. (TSE:TCW) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Trican Well Service's Net Debt?
The image below, which you can click on for greater detail, shows that Trican Well Service had debt of CA$12.0m at the end of June 2019, a reduction from CA$72.4m over a year. But it also has CA$24.5m in cash to offset that, meaning it has CA$12.5m net cash.
A Look At Trican Well Service's Liabilities
The latest balance sheet data shows that Trican Well Service had liabilities of CA$92.4m due within a year, and liabilities of CA$72.2m falling due after that. Offsetting these obligations, it had cash of CA$24.5m as well as receivables valued at CA$100.4m due within 12 months. So it has liabilities totalling CA$39.7m more than its cash and near-term receivables, combined.
Of course, Trican Well Service has a market capitalization of CA$264.5m, 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, Trican Well Service 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 Trican Well Service's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Trican Well Service made a loss at the EBIT level, and saw its revenue drop to CA$778m, which is a fall of 31%. To be frank that doesn't bode well.
So How Risky Is Trican Well Service?
While Trican Well Service lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$54m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Trican Well Service insider transactions.
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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