Tox Free Solutions Limited (ASX: TOX) is an integrated waste management and industrial service provider operating nationwide in the mining, energy and industrial sectors.
In 2013, a number of acquisitions have grown the company's footprint into QLD and its Western Australian business coverage has expanded. The QLD businesses are operating in the major cities and providing services in the Surat Basin region where gas resources for the LNG industry are being developed.
It was recently awarded a five-year contract from Chevron Australia for total waste management worth an estimated $170 million over the term at the energy producer's Gorgon project, where it is overseeing waste management during the project construction phase.
Acquisitions, growth and financial strength
As an investor, I like to see good growth in revenue and earnings, so when a company does a number of acquisitions over a short space of time, revenue and earnings should pop up, but then I wonder if its debt is too high or unmanageable, and profit margins will start to dwindle.
For retail stores you can look at like-for-like sales growth where revenue from newly acquired stores is filtered out. For industrials, you have to wait for the smoke to clear, and see what happens when a company leaves the acquisition trail. What you have to look for initially is if the financial strength becomes "brittle" because debt becomes burdensome.
Transpacific Industries Group Ltd. (ASX: TPI), the $1.78 billion waste management company, followed this path before the GFC, buying company after company, driving up debt, but gaining market followers along the way. When the global economy nosedived, it did too. It is still recovering from that time and now making progress.
Over the past three years, Tox Free Solutions has raised NPAT before abnormals from $7.9 million to $22.8 million. At the same time total revenue has almost tripled from $99 million to about $286 million. Top and bottom line growth achieved.
Long-term debt has gone up about five times from $13 million in 2010 to around $101 million as at 30 June 2013. Gross gearing is at 50%, but I look at long-term debt to net earnings and a ratio above five starts to concern me. The company's ratio would be $101 million divided by $22.8 million = 4.4, so it's still in a safe zone, but getting close to the edge.
Foolish takeaway
Waste management may not be a glamourous industry, but modern society and industries generate so much that it has to be taken care of on a daily basis. Imagine the amount of rubbish we don't want anymore and you can understand the business it creates.
I am starting to see more Tox Free Solutions logos on trucks in my area as well, and I always investigate companies I see. The company is growing at a good pace, buying competitors along the way. If it can pay down its debt with better earnings, that would show management has the true long-term view in sight.
