The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that ThermoGenesis Holdings, Inc. (NASDAQ:THMO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 ThermoGenesis Holdings’s Net Debt?
As you can see below, at the end of March 2021, ThermoGenesis Holdings had US$7.33m of debt, up from US$4.76m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$10.0m in cash, so it actually has US$2.68m net cash.
How Strong Is ThermoGenesis Holdings’ Balance Sheet?
The latest balance sheet data shows that ThermoGenesis Holdings had liabilities of US$10.5m due within a year, and liabilities of US$2.67m falling due after that. On the other hand, it had cash of US$10.0m and US$826.0k worth of receivables due within a year. So its liabilities total US$2.32m more than the combination of its cash and short-term receivables.
Since publicly traded ThermoGenesis Holdings shares are worth a total of US$32.6m, 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, ThermoGenesis Holdings 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 ThermoGenesis Holdings can strengthen its balance sheet over time.
In the last year ThermoGenesis Holdings had a loss before interest and tax, and actually shrunk its revenue by 39%, to US$8.1m. To be frank that doesn’t bode well.
So How Risky Is ThermoGenesis Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ThermoGenesis Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$16m of cash and made a loss of US$14m. But at least it has US$2.68m on the balance sheet to spend on growth, near-term. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it.