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Is T2 Biosystems (NASDAQ:TTOO) Using Debt Sensibly?

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 T2 Biosystems, Inc. (NASDAQ:TTOO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

View our latest analysis for T2 Biosystems

What Is T2 Biosystems's Net Debt?

As you can see below, T2 Biosystems had US$46.5m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$52.8m in cash offsetting this, leading to net cash of US$6.30m.


How Strong Is T2 Biosystems' Balance Sheet?

The latest balance sheet data shows that T2 Biosystems had liabilities of US$9.35m due within a year, and liabilities of US$60.5m falling due after that. Offsetting this, it had US$52.8m in cash and US$3.98m in receivables that were due within 12 months. So it has liabilities totalling US$13.1m more than its cash and near-term receivables, combined.

Since publicly traded T2 Biosystems shares are worth a total of US$144.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, T2 Biosystems also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 T2 Biosystems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year T2 Biosystems wasn't profitable at an EBIT level, but managed to grow its revenue by 171%, to US$27m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is T2 Biosystems?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that T2 Biosystems had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$35m and booked a US$44m accounting loss. Given it only has net cash of US$6.30m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, T2 Biosystems's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for T2 Biosystems (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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