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Here's Why ToughBuilt Industries (NASDAQ:TBLT) Can Manage Its Debt Despite Losing Money

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Simply Wall St
·4 min read
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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ToughBuilt Industries, Inc. (NASDAQ:TBLT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ToughBuilt Industries

What Is ToughBuilt Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ToughBuilt Industries had US$3.46m of debt in September 2020, down from US$9.58m, one year before. However, its balance sheet shows it holds US$8.89m in cash, so it actually has US$5.43m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is ToughBuilt Industries' Balance Sheet?

According to the balance sheet data, ToughBuilt Industries had liabilities of US$9.52m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of US$8.89m as well as receivables valued at US$16.2m due within 12 months. So it actually has US$15.5m more liquid assets than total liabilities.

This surplus suggests that ToughBuilt Industries is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, ToughBuilt Industries boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ToughBuilt Industries 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.

Over 12 months, ToughBuilt Industries reported revenue of US$32m, which is a gain of 78%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ToughBuilt Industries?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that ToughBuilt Industries had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$23m of cash and made a loss of US$7.4m. Given it only has net cash of US$5.43m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, ToughBuilt Industries may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with ToughBuilt Industries (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.