Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that TELA Bio, Inc. (NASDAQ:TELA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does TELA Bio Carry?
As you can see below, TELA Bio had US$31.5m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$43.9m in cash, leading to a US$12.4m net cash position.
How Healthy Is TELA Bio's Balance Sheet?
The latest balance sheet data shows that TELA Bio had liabilities of US$10.6m due within a year, and liabilities of US$31.9m falling due after that. Offsetting these obligations, it had cash of US$43.9m as well as receivables valued at US$4.23m due within 12 months. So it can boast US$5.72m more liquid assets than total liabilities.
This short term liquidity is a sign that TELA Bio could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TELA Bio boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TELA Bio can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, TELA Bio reported revenue of US$29m, which is a gain of 62%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is TELA Bio?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months TELA Bio lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$31m of cash and made a loss of US$33m. But at least it has US$12.4m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, TELA Bio may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TELA Bio is showing 2 warning signs in our investment analysis , you should know about...
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.
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.