Is EDAP TMS (NASDAQ:EDAP) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies EDAP TMS S.A. (NASDAQ:EDAP) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for EDAP TMS

What Is EDAP TMS's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 EDAP TMS had €7.79m of debt, an increase on €2.55m, over one year. But on the other hand it also has €46.5m in cash, leading to a €38.7m net cash position.

How Healthy Is EDAP TMS' Balance Sheet?

According to the last reported balance sheet, EDAP TMS had liabilities of €16.2m due within 12 months, and liabilities of €9.47m due beyond 12 months. Offsetting these obligations, it had cash of €46.5m as well as receivables valued at €12.0m due within 12 months. So it can boast €32.8m more liquid assets than total liabilities.

This surplus suggests that EDAP TMS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that EDAP TMS has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EDAP TMS's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year EDAP TMS wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to €47m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is EDAP TMS?

Although EDAP TMS had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €284k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for EDAP TMS that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.