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.’ 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, TransMedics Group, Inc. (NASDAQ:TMDX) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does TransMedics Group Carry?
As you can see below, at the end of September 2022, TransMedics Group had US$58.5m of debt, up from US$35.1m a year ago. Click the image for more detail. But it also has US$204.5m in cash to offset that, meaning it has US$145.9m net cash.
A Look At TransMedics Group’s Liabilities
We can see from the most recent balance sheet that TransMedics Group had liabilities of US$20.7m falling due within a year, and liabilities of US$66.3m due beyond that. Offsetting this, it had US$204.5m in cash and US$22.0m in receivables that were due within 12 months. So it can boast US$139.5m more liquid assets than total liabilities.
This short term liquidity is a sign that TransMedics Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TransMedics Group boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TransMedics Group can strengthen its balance sheet over time.
Over 12 months, TransMedics Group reported revenue of US$72m, which is a gain of 154%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is TransMedics Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year TransMedics Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$61m of cash and made a loss of US$42m. But at least it has US$145.9m on the balance sheet to spend on growth, near-term. The good news for shareholders is that TransMedics Group has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years.