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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies EDAP TMS S.A. (NASDAQ:EDAP) makes use of debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is EDAP TMS's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 EDAP TMS had €6.75m of debt, an increase on €4.72m, over one year. However, it does have €19.5m in cash offsetting this, leading to net cash of €12.7m.
How Healthy Is EDAP TMS's Balance Sheet?
The latest balance sheet data shows that EDAP TMS had liabilities of €16.8m due within a year, and liabilities of €6.96m falling due after that. Offsetting these obligations, it had cash of €19.5m as well as receivables valued at €13.3m due within 12 months. So it can boast €9.01m more liquid assets than total liabilities.
This short term liquidity is a sign that EDAP TMS could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, EDAP TMS boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EDAP TMS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year EDAP TMS managed to grow its revenue by 11%, to €40m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is EDAP TMS?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year EDAP TMS had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through €1.7m of cash and made a loss of €99k. But the saving grace is the €19m on the balance sheet. That kitty means the company can keep spending for growth for at least five years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like EDAP TMS I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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