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 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 note that HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is HTG Molecular Diagnostics's Debt?
As you can see below, HTG Molecular Diagnostics had US$9.81m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$37.9m in cash, so it actually has US$28.1m net cash.
How Strong Is HTG Molecular Diagnostics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that HTG Molecular Diagnostics had liabilities of US$8.42m due within 12 months and liabilities of US$14.4m due beyond that. On the other hand, it had cash of US$37.9m and US$3.93m worth of receivables due within a year. So it can boast US$19.0m more liquid assets than total liabilities.
This excess liquidity is a great indication that HTG Molecular Diagnostics's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that HTG Molecular Diagnostics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HTG Molecular Diagnostics'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 HTG Molecular Diagnostics wasn't profitable at an EBIT level, but managed to grow its revenue by2.1%, to US$22m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is HTG Molecular Diagnostics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that HTG Molecular Diagnostics had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$16m and booked a US$17m accounting loss. However, it has net cash of US$28.1m, so it has a bit of time before it will need more capital. 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 HTG Molecular Diagnostics 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.
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.
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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. Thank you for reading.