Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 can see that HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does HTG Molecular Diagnostics Carry?

The image below, which you can click on for greater detail, shows that at March 2021 HTG Molecular Diagnostics had debt of US$11.5m, up from US$9.90m in one year. However, it does have US$30.8m in cash offsetting this, leading to net cash of US$19.2m.

How Healthy Is HTG Molecular Diagnostics’ Balance Sheet?

We can see from the most recent balance sheet that HTG Molecular Diagnostics had liabilities of US$8.34m falling due within a year, and liabilities of US$11.5m due beyond that. On the other hand, it had cash of US$30.8m and US$1.25m worth of receivables due within a year. So it actually has US$12.2m more liquid assets than total liabilities.

This excess liquidity suggests that HTG Molecular Diagnostics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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.

Over 12 months, HTG Molecular Diagnostics made a loss at the EBIT level, and saw its revenue drop to US$7.8m, which is a fall of 57%. That makes us nervous, to say the least.

So How Risky Is HTG Molecular Diagnostics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that HTG Molecular Diagnostics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$17m of cash and made a loss of US$20m. But at least it has US$19.2m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt.