Is Tucows (NASDAQ: TCX) Using Too Much Debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Tucows Inc. (NASDAQ: TCX) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Tucows

How much debt does Tucows have?

You can click on the graph below for the historical numbers, but it shows that as of June 2021, Tucows had a debt of US $ 139.9 million, an increase from US $ 113.6 million, over a year. However, he also had $ 7.26 million in cash, so his net debt is $ 132.6 million.

NasdaqCM: History of debt to equity of TCX November 4, 2021

A look at the responsibilities of Tucows

Zooming in on the latest balance sheet data, we can see that Tucows had a liability of US $ 170.7 million due within 12 months and a liability of US $ 202.0 million due beyond. In compensation for these obligations, it had cash of US $ 7.26 million as well as receivables valued at US $ 18.9 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 346.6 million.

This shortfall isn’t that big of a deal as Tucows is worth $ 926.1 million, and so could possibly raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Tucows’ earnings that will influence how the balance sheet looks going forward. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Tucows has incurred a loss before interest and taxes and has actually reduced income by 14%, to $ 291 million. We would much prefer to see the growth.

Emptor Warning

While Tucows’ decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. To be precise, the EBIT loss amounted to US $ 3.4 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent $ 27 million in cash in the past year. Suffice it to say that we consider the action risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, Tucows has 5 warning signs (and 1 that can’t be ignored) we think you should be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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