Health Check: How Prudently Does Tekmar Group (LON:TGP) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tekmar Group plc (LON:TGP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Tekmar Group

What Is Tekmar Group's Net Debt?

As you can see below, at the end of March 2022, Tekmar Group had UK£5.64m of debt, up from none a year ago. Click the image for more detail. However, it does have UK£10.4m in cash offsetting this, leading to net cash of UK£4.73m.

How Healthy Is Tekmar Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tekmar Group had liabilities of UK£15.0m due within 12 months and liabilities of UK£3.77m due beyond that. On the other hand, it had cash of UK£10.4m and UK£15.1m worth of receivables due within a year. So it can boast UK£6.70m more liquid assets than total liabilities.

This surplus liquidity suggests that Tekmar Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Tekmar 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 Tekmar Group 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, Tekmar Group reported revenue of UK£30m, which is a gain of 4.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Tekmar Group?

Although Tekmar Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£1.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Tekmar Group you should be aware of, and 1 of them is a bit unpleasant.

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.