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We Think Trinity Exploration & Production (LON:TRIN) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Trinity Exploration & Production plc (LON:TRIN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Trinity Exploration & Production

How Much Debt Does Trinity Exploration & Production Carry?

The chart below, which you can click on for greater detail, shows that Trinity Exploration & Production had US$2.70m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds US$18.3m in cash, so it actually has US$15.6m net cash.


A Look At Trinity Exploration & Production's Liabilities

We can see from the most recent balance sheet that Trinity Exploration & Production had liabilities of US$15.1m falling due within a year, and liabilities of US$57.8m due beyond that. Offsetting this, it had US$18.3m in cash and US$9.85m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$44.7m.

This deficit is considerable relative to its market capitalization of US$56.3m, so it does suggest shareholders should keep an eye on Trinity Exploration & Production's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Trinity Exploration & Production boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Trinity Exploration & Production grew its EBIT by 769% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Trinity Exploration & Production 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Trinity Exploration & Production 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. During the last two years, Trinity Exploration & Production produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Trinity Exploration & Production'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$15.6m. And we liked the look of last year's 769% year-on-year EBIT growth. So is Trinity Exploration & Production's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Trinity Exploration & Production (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.