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. We can see that Teekay Tankers Ltd. (NYSE:TNK) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Teekay Tankers Carry?
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. But it also has US$67.5m in cash to offset that, meaning it has US$6.00m net cash.
A Look At Teekay Tankers' Liabilities
According to the last reported balance sheet, Teekay Tankers had liabilities of US$191.3m due within 12 months, and liabilities of US$581.5m due beyond 12 months. Offsetting these obligations, it had cash of US$67.5m as well as receivables valued at US$125.6m due within 12 months. So it has liabilities totalling US$579.7m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of US$820.7m, so it does suggest shareholders should keep an eye on Teekay Tankers' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Teekay Tankers 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 Teekay Tankers can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Teekay Tankers reported revenue of US$693m, which is a gain of 23%, 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 Teekay Tankers?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Teekay Tankers lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$81m of cash and made a loss of US$77m. With only US$6.00m on the balance sheet, it would appear that its going to need to raise capital again soon. Teekay Tankers's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Teekay Tankers's profit, revenue, and operating cashflow have changed over the last few years.
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.
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