Health Check: How Prudently Does Tandem Diabetes Care (NASDAQ:TNDM) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tandem Diabetes Care

How Much Debt Does Tandem Diabetes Care Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Tandem Diabetes Care had debt of US$347.9m, up from US$284.1m in one year. But it also has US$452.4m in cash to offset that, meaning it has US$104.5m net cash.

How Strong Is Tandem Diabetes Care's Balance Sheet?

We can see from the most recent balance sheet that Tandem Diabetes Care had liabilities of US$240.6m falling due within a year, and liabilities of US$463.0m due beyond that. On the other hand, it had cash of US$452.4m and US$98.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$153.1m.

Of course, Tandem Diabetes Care has a market capitalization of US$2.78b, 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. While it does have liabilities worth noting, Tandem Diabetes Care also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tandem Diabetes Care'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.

Over 12 months, Tandem Diabetes Care saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Tandem Diabetes Care?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Tandem Diabetes Care had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$64m of cash and made a loss of US$136m. But the saving grace is the US$104.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tandem Diabetes Care 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.

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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.