Is Tactile Systems Technology (NASDAQ:TCMD) A Risky Investment?

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. We note that Tactile Systems Technology, Inc. (NASDAQ:TCMD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Tactile Systems Technology

What Is Tactile Systems Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tactile Systems Technology had US$50.3m of debt, an increase on none, over one year. On the flip side, it has US$23.4m in cash leading to net debt of about US$27.0m.

A Look At Tactile Systems Technology's Liabilities

The latest balance sheet data shows that Tactile Systems Technology had liabilities of US$46.5m due within a year, and liabilities of US$76.6m falling due after that. Offsetting this, it had US$23.4m in cash and US$62.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$37.3m.

While this might seem like a lot, it is not so bad since Tactile Systems Technology has a market capitalization of US$142.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Tactile Systems Technology'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.

In the last year Tactile Systems Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 9.7%, to US$222m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tactile Systems Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$17m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$31m. So to be blunt we do think it is risky. For riskier companies like Tactile Systems Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.