Here's Why Trifast (LON:TRI) Can Manage Its Debt Responsibly
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 Trifast plc (LON:TRI) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Trifast
How Much Debt Does Trifast Carry?
You can click the graphic below for the historical numbers, but it shows that Trifast had UK£26.5m of debt in September 2020, down from UK£40.7m, one year before. However, its balance sheet shows it holds UK£29.8m in cash, so it actually has UK£3.27m net cash.
How Healthy Is Trifast's Balance Sheet?
The latest balance sheet data shows that Trifast had liabilities of UK£38.9m due within a year, and liabilities of UK£42.2m falling due after that. Offsetting this, it had UK£29.8m in cash and UK£49.3m in receivables that were due within 12 months. So its liabilities total UK£2.04m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Trifast's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the UK£186.2m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Trifast also has more cash than debt, so we're pretty confident it can manage its debt safely.
The modesty of its debt load may become crucial for Trifast if management cannot prevent a repeat of the 58% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Trifast 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Trifast 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. During the last three years, Trifast produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
We could understand if investors are concerned about Trifast's liabilities, but we can be reassured by the fact it has has net cash of UK£3.27m. So we are not troubled with Trifast's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Trifast you should be aware of.
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.
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.
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