Is Tactile Systems Technology (NASDAQ:TCMD) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tactile Systems Technology, Inc. (NASDAQ:TCMD) does carry 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tactile Systems Technology

What Is Tactile Systems Technology's Debt?

As you can see below, Tactile Systems Technology had US$49.6m of debt at September 2022, down from US$54.7m a year prior. On the flip side, it has US$23.4m in cash leading to net debt of about US$26.2m.

A Look At Tactile Systems Technology's Liabilities

We can see from the most recent balance sheet that Tactile Systems Technology had liabilities of US$55.7m falling due within a year, and liabilities of US$78.5m due beyond that. Offsetting this, it had US$23.4m in cash and US$66.9m in receivables that were due within 12 months. So its liabilities total US$43.8m more than the combination of its cash and short-term receivables.

Of course, Tactile Systems Technology has a market capitalization of US$274.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tactile Systems Technology can strengthen its balance sheet over time. 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 14%, to US$235m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tactile Systems Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$5.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$30m. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Tactile Systems Technology's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.