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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Tejon Ranch Co. (NYSE:TRC) makes use of debt. But is this debt a concern to shareholders?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Tejon Ranch Carry?
As you can see below, Tejon Ranch had US$66.4m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had US$60.0m in cash, and so its net debt is US$6.35m.
How Healthy Is Tejon Ranch's Balance Sheet?
The latest balance sheet data shows that Tejon Ranch had liabilities of US$14.1m due within a year, and liabilities of US$79.8m falling due after that. Offsetting these obligations, it had cash of US$60.0m as well as receivables valued at US$2.59m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$31.3m.
Of course, Tejon Ranch has a market capitalization of US$430.7m, 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. But either way, Tejon Ranch has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Tejon Ranch's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Tejon Ranch wasn't profitable at an EBIT level, but managed to grow its revenue by11%, to US$47m. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Tejon Ranch had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$1.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$3.8m and the profit of US$4.6m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. For riskier companies like Tejon Ranch I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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