Is HTG Molecular Diagnostics (NASDAQ:HTGM) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HTG Molecular Diagnostics

What Is HTG Molecular Diagnostics's Debt?

As you can see below, HTG Molecular Diagnostics had US$15.1m of debt at September 2021, down from US$16.8m a year prior. However, its balance sheet shows it holds US$25.4m in cash, so it actually has US$10.3m net cash.

A Look At HTG Molecular Diagnostics' Liabilities

We can see from the most recent balance sheet that HTG Molecular Diagnostics had liabilities of US$8.08m falling due within a year, and liabilities of US$11.5m due beyond that. Offsetting these obligations, it had cash of US$25.4m as well as receivables valued at US$1.90m due within 12 months. So it actually has US$7.70m more liquid assets than total liabilities.

This excess liquidity suggests that HTG Molecular Diagnostics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that HTG Molecular Diagnostics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HTG Molecular Diagnostics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, HTG Molecular Diagnostics made a loss at the EBIT level, and saw its revenue drop to US$8.6m, which is a fall of 20%. We would much prefer see growth.

So How Risky Is HTG Molecular Diagnostics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that HTG Molecular Diagnostics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$17m of cash and made a loss of US$16m. However, it has net cash of US$10.3m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 HTG Molecular Diagnostics is showing 4 warning signs in our investment analysis , 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.