Does Treace Medical Concepts (NASDAQ:TMCI) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Treace Medical Concepts, Inc. (NASDAQ:TMCI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

Check out our latest analysis for Treace Medical Concepts

What Is Treace Medical Concepts's Debt?

The chart below, which you can click on for greater detail, shows that Treace Medical Concepts had US$52.9m in debt in September 2023; about the same as the year before. However, it does have US$122.2m in cash offsetting this, leading to net cash of US$69.2m.

How Strong Is Treace Medical Concepts' Balance Sheet?

According to the last reported balance sheet, Treace Medical Concepts had liabilities of US$33.2m due within 12 months, and liabilities of US$69.3m due beyond 12 months. Offsetting this, it had US$122.2m in cash and US$25.0m in receivables that were due within 12 months. So it actually has US$44.7m more liquid assets than total liabilities.

This surplus suggests that Treace Medical Concepts has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Treace Medical Concepts 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 Treace Medical Concepts'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.

In the last year Treace Medical Concepts wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to US$175m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Treace Medical Concepts?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Treace Medical Concepts had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$52m of cash and made a loss of US$48m. However, it has net cash of US$69.2m, so it has a bit of time before it will need more capital. Treace Medical Concepts's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 3 warning signs with Treace Medical Concepts , and understanding them should be part of your investment process.

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.

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.