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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Tandem Diabetes Care's Net Debt?
As you can see below, at the end of June 2020, Tandem Diabetes Care had US$195.3m of debt, up from none a year ago. Click the image for more detail. But it also has US$426.3m in cash to offset that, meaning it has US$230.9m net cash.
A Look At Tandem Diabetes Care's Liabilities
We can see from the most recent balance sheet that Tandem Diabetes Care had liabilities of US$114.3m falling due within a year, and liabilities of US$234.2m due beyond that. Offsetting these obligations, it had cash of US$426.3m as well as receivables valued at US$45.0m due within 12 months. So it actually has US$122.8m more liquid assets than total liabilities.
Having regard to Tandem Diabetes Care's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.54b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Tandem Diabetes Care has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Tandem Diabetes Care 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.
Over 12 months, Tandem Diabetes Care reported revenue of US$410m, which is a gain of 45%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Tandem Diabetes Care?
While Tandem Diabetes Care lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$4.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 45% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Tandem Diabetes Care , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. 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.
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