Tekmar Group (LON:TGP) Is Making Moderate Use Of Debt

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 Tekmar Group plc (LON:TGP) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at 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 September 2021, Tekmar Group had UK£6.05m of debt, up from UK£3.00m a year ago. Click the image for more detail. On the flip side, it has UK£3.48m in cash leading to net debt of about UK£2.57m.

A Look At Tekmar Group's Liabilities

We can see from the most recent balance sheet that Tekmar Group had liabilities of UK£12.5m falling due within a year, and liabilities of UK£3.65m due beyond that. Offsetting these obligations, it had cash of UK£3.48m as well as receivables valued at UK£17.4m due within 12 months. So it can boast UK£4.68m more liquid assets than total liabilities.

This excess liquidity suggests that Tekmar Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Tekmar Group had a loss before interest and tax, and actually shrunk its revenue by 20%, to UK£31m. That's not what we would hope to see.

Caveat Emptor

While Tekmar Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable UK£3.6m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. Be aware that Tekmar Group is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.