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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, TELA Bio, Inc. (NASDAQ:TELA) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 TELA Bio's Net Debt?
The chart below, which you can click on for greater detail, shows that TELA Bio had US$31.1m in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds US$60.3m in cash, so it actually has US$29.1m net cash.
A Look At TELA Bio's Liabilities
The latest balance sheet data shows that TELA Bio had liabilities of US$7.29m due within a year, and liabilities of US$31.5m falling due after that. Offsetting this, it had US$60.3m in cash and US$3.55m in receivables that were due within 12 months. So it can boast US$25.0m more liquid assets than total liabilities.
This short term liquidity is a sign that TELA Bio could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TELA Bio 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 it is future earnings, more than anything, that will determine TELA Bio'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 TELA Bio wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to US$24m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is TELA Bio?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that TELA Bio 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$25m and booked a US$32m accounting loss. But at least it has US$29.1m on the balance sheet to spend on growth, near-term. TELA Bio's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TELA Bio is showing 2 warning signs in our investment analysis , you should know about...
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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