Does Twin Disc (NASDAQ: TWIN) have a healthy track record?

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Warren Buffett said: “Volatility is far from synonymous with 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. We can see that Twin disc, incorporated (NASDAQ: TWIN) uses debt in its business. But does this debt worry shareholders?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. 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.

How much debt does Twin Disc carry?

The image below, which you can click for more details, shows that Twin Disc had a debt of US $ 33.0 million at the end of June 2021, a reduction from US $ 44.0 million. over a year. On the other hand, it has $ 12.3 million in cash, resulting in net debt of around $ 20.6 million.

NasdaqGS: TWIN Debt to Equity History October 29, 2021

A look at the responsibilities of Twin Disc

According to the latest published balance sheet, Twin Disc had liabilities of US $ 78.6 million due within 12 months and liabilities of US $ 66.2 million due beyond 12 months. On the other hand, it had US $ 12.3 million in cash and US $ 39.5 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 92.9 million.

This shortfall isn’t that big of a deal as Twin Disc is worth $ 168.2 million, so it could probably 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. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Twin Disc’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over the past year, Twin Disc recorded a loss before interest and taxes and actually reduced its revenue by 11%, to $ 219 million. We would much prefer to see the growth.

Emptor Warning

Not only has Twin Disc’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to US $ 6.1 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. We therefore believe that its record is a bit strained, but not irreparable. We’d be better off if he turned his 12-month, $ 30 million loss into profit. So, to be frank, we think it’s risky. For riskier companies like Twin Disc, I always like to keep an eye out for long-term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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 material. Simply Wall St has no position in the mentioned stocks.

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