Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Traeger, Inc. (NYSE:COOK) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Traeger's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Traeger had US$426.0m of debt in December 2023, down from US$480.1m, one year before. However, it also had US$29.9m in cash, and so its net debt is US$396.0m.
How Strong Is Traeger's Balance Sheet?
We can see from the most recent balance sheet that Traeger had liabilities of US$134.0m falling due within a year, and liabilities of US$435.4m due beyond that. Offsetting these obligations, it had cash of US$29.9m as well as receivables valued at US$59.9m due within 12 months. So its liabilities total US$479.6m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$313.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Traeger would likely require a major re-capitalisation if it had to pay its creditors today. 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 Traeger 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, Traeger made a loss at the EBIT level, and saw its revenue drop to US$606m, which is a fall of 7.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Traeger produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$51m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$84m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Traeger is showing 2 warning signs in our investment analysis , you should know about...
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.