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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Tandem Diabetes Care's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tandem Diabetes Care had US$203.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$484.9m in cash, so it actually has US$282.0m net cash.
A Look At Tandem Diabetes Care's Liabilities
According to the last reported balance sheet, Tandem Diabetes Care had liabilities of US$103.9m due within 12 months, and liabilities of US$246.3m due beyond 12 months. Offsetting these obligations, it had cash of US$484.9m as well as receivables valued at US$82.2m due within 12 months. So it can boast US$217.0m more liquid assets than total liabilities.
This surplus suggests that Tandem Diabetes Care has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tandem Diabetes Care 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 Tandem Diabetes Care'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.
Over 12 months, Tandem Diabetes Care reported revenue of US$499m, which is a gain of 38%, 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 Tandem Diabetes Care?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Tandem Diabetes Care had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$7.6m and booked a US$34m accounting loss. With only US$282.0m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Tandem Diabetes Care may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 2 warning signs for Tandem Diabetes Care that you should be aware of.
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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