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.' 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 Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. 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 Tandem Diabetes Care's Net Debt?
The chart below, which you can click on for greater detail, shows that Tandem Diabetes Care had US$289.7m in debt in December 2023; about the same as the year before. But on the other hand it also has US$467.9m in cash, leading to a US$178.2m net cash position.
How Strong Is Tandem Diabetes Care's Balance Sheet?
According to the last reported balance sheet, Tandem Diabetes Care had liabilities of US$195.3m due within 12 months, and liabilities of US$443.8m due beyond 12 months. Offsetting these obligations, it had cash of US$467.9m as well as receivables valued at US$105.6m due within 12 months. So its liabilities total US$65.6m more than the combination of its cash and short-term receivables.
Given Tandem Diabetes Care has a market capitalization of US$2.13b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Tandem Diabetes Care also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tandem Diabetes Care can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Tandem Diabetes Care made a loss at the EBIT level, and saw its revenue drop to US$748m, which is a fall of 6.7%. We would much prefer see growth.
So How Risky Is Tandem Diabetes Care?
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 Tandem Diabetes Care 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$83m and booked a US$223m accounting loss. But the saving grace is the US$178.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tandem Diabetes Care .
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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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.