Tactile Systems Technology (NASDAQ:TCMD) Has A Rock Solid Balance Sheet

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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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

How Much Debt Does Tactile Systems Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Tactile Systems Technology had US$26.2m of debt in December 2024, down from US$29.1m, one year before. However, its balance sheet shows it holds US$94.4m in cash, so it actually has US$68.2m net cash.

How Healthy Is Tactile Systems Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tactile Systems Technology had liabilities of US$40.7m due within 12 months and liabilities of US$40.6m due beyond that. Offsetting this, it had US$94.4m in cash and US$59.5m in receivables that were due within 12 months. So it actually has US$72.5m more liquid assets than total liabilities.

It's good to see that Tactile Systems Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Tactile Systems Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tactile Systems Technology grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tactile Systems Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Tactile Systems Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tactile Systems Technology has US$68.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$38m, being 189% of its EBIT. The bottom line is that we do not find Tactile Systems Technology's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tactile Systems Technology that you should be aware of.

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.