The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies TransMedics Group, Inc. (NASDAQ:TMDX) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is TransMedics Group's Net Debt?
As you can see below, at the end of September 2019, TransMedics Group had US$34.0m of debt, up from US$33.6 a year ago. Click the image for more detail. But on the other hand it also has US$88.3m in cash, leading to a US$54.2m net cash position.
How Healthy Is TransMedics Group's Balance Sheet?
The latest balance sheet data shows that TransMedics Group had liabilities of US$14.6m due within a year, and liabilities of US$34.5m falling due after that. Offsetting this, it had US$88.3m in cash and US$6.47m in receivables that were due within 12 months. So it actually has US$45.6m more liquid assets than total liabilities.
This short term liquidity is a sign that TransMedics Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TransMedics Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TransMedics Group 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, TransMedics Group reported revenue of US$21m, which is a gain of 83%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is TransMedics Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months TransMedics Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$31m and booked a US$32m accounting loss. But the saving grace is the US$54.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, TransMedics Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for TransMedics Group that you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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