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 note that TETRA Technologies, Inc. (NYSE:TTI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does TETRA Technologies Carry?
As you can see below, TETRA Technologies had US$164.2m of debt at September 2021, down from US$843.2m a year prior. On the flip side, it has US$41.9m in cash leading to net debt of about US$122.4m.
A Look At TETRA Technologies' Liabilities
According to the last reported balance sheet, TETRA Technologies had liabilities of US$92.6m due within 12 months, and liabilities of US$218.6m due beyond 12 months. Offsetting these obligations, it had cash of US$41.9m as well as receivables valued at US$79.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$190.2m.
TETRA Technologies has a market capitalization of US$373.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TETRA Technologies'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.
In the last year TETRA Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 312%, to US$351m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Caveat Emptor
Despite the top line growth, TETRA Technologies still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$19m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$8.5m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for TETRA Technologies that 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.
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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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