Yahoo Finance Here's Why Trican Well Service (TSE:TCW) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Trican Well Service Ltd. (TSE:TCW) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for Trican Well Service
What Is Trican Well Service's Net Debt?
As you can see below, at the end of June 2022, Trican Well Service had CA$29.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CA$58.3m in cash, leading to a CA$28.5m net cash position.
How Healthy Is Trican Well Service's Balance Sheet?
We can see from the most recent balance sheet that Trican Well Service had liabilities of CA$125.3m falling due within a year, and liabilities of CA$18.7m due beyond that. On the other hand, it had cash of CA$58.3m and CA$156.4m worth of receivables due within a year. So it actually has CA$70.7m more liquid assets than total liabilities.
This surplus suggests that Trican Well Service has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Trican Well Service boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Trican Well Service turned things around in the last 12 months, delivering and EBIT of CA$26m. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Trican Well Service 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. Considering the last year, Trican Well Service actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Trican Well Service has net cash of CA$28.5m, as well as more liquid assets than liabilities. So we don't have any problem with Trican Well Service's use of debt. 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. For example - Trican Well Service has 1 warning sign we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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