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.' 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. Importantly, Teekay Tankers Ltd. (NYSE:TNK) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Teekay Tankers

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$22.4m at the end of September 2022, a reduction from US$397.8m over a year. But on the other hand it also has US$79.8m in cash, leading to a US$57.5m net cash position.

How Strong Is Teekay Tankers' Balance Sheet?

The latest balance sheet data shows that Teekay Tankers had liabilities of US$175.2m due within a year, and liabilities of US$534.7m falling due after that. On the other hand, it had cash of US$79.8m and US$159.6m worth of receivables due within a year. So it has liabilities totalling US$470.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Teekay Tankers is worth US$923.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Teekay Tankers also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Teekay Tankers improved its EBIT from a last year's loss to a positive US$76m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Teekay Tankers can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Teekay Tankers may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last year, Teekay Tankers created free cash flow amounting to 6.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Teekay Tankers's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$57.5m. So although we see some areas for improvement, we're not too worried about Teekay Tankers's balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Teekay Tankers's earnings per share history for free.

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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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.