Alpha Tau Medical (NASDAQ:DRTS) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Alpha Tau Medical Ltd. (NASDAQ:DRTS) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alpha Tau Medical

What Is Alpha Tau Medical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Alpha Tau Medical had US$5.53m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$77.6m in cash, so it actually has US$72.0m net cash.

A Look At Alpha Tau Medical's Liabilities

We can see from the most recent balance sheet that Alpha Tau Medical had liabilities of US$7.00m falling due within a year, and liabilities of US$16.4m due beyond that. Offsetting these obligations, it had cash of US$77.6m as well as receivables valued at US$344.0k due within 12 months. So it can boast US$54.5m more liquid assets than total liabilities.

This surplus suggests that Alpha Tau Medical is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Alpha Tau Medical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alpha Tau Medical 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.

Given its lack of meaningful operating revenue, Alpha Tau Medical shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is Alpha Tau Medical?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Alpha Tau Medical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$24m of cash and made a loss of US$29m. While this does make the company a bit risky, it's important to remember it has net cash of US$72.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alpha Tau Medical you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.