David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Teekay Tankers Ltd. (NYSE:TNK) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Teekay Tankers's Net Debt?
The image below, which you can click on for greater detail, shows that Teekay Tankers had debt of US$61.5m at the end of June 2022, a reduction from US$303.9m over a year. However, it does have US$66.3m in cash offsetting this, leading to net cash of US$4.78m.
A Look At Teekay Tankers' Liabilities
The latest balance sheet data shows that Teekay Tankers had liabilities of US$191.3m due within a year, and liabilities of US$581.5m falling due after that. Offsetting these obligations, it had cash of US$66.3m as well as receivables valued at US$125.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$581.0m.
This is a mountain of leverage relative to its market capitalization of US$771.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Teekay Tankers also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Teekay Tankers'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.
In the last year Teekay Tankers wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$693m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Teekay Tankers?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Teekay Tankers lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$81m and booked a US$77m accounting loss. Given it only has net cash of US$4.78m, 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, Teekay Tankers may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Teekay Tankers I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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