Treace Medical Concepts (NASDAQ:TMCI) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Treace Medical Concepts, Inc. (NASDAQ:TMCI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at 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$53.1m in debt in March 2024; about the same as the year before. But on the other hand it also has US$110.0m in cash, leading to a US$56.9m net cash position.

A Look At Treace Medical Concepts' Liabilities

The latest balance sheet data shows that Treace Medical Concepts had liabilities of US$47.0m due within a year, and liabilities of US$69.3m falling due after that. On the other hand, it had cash of US$110.0m and US$31.1m worth of receivables due within a year. So it can boast US$24.8m 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 ultimately the future profitability of the business will decide if Treace Medical Concepts 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.

In the last year Treace Medical Concepts wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$196m. With any luck the company will be able to grow its way to profitability.

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 in the last year Treace Medical Concepts had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$38m of cash and made a loss of US$55m. But the saving grace is the US$56.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Treace Medical Concepts is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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