Is Tandem Diabetes Care (NASDAQ:TNDM) Weighed On By Its Debt Load?

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.' 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. Importantly, Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tandem Diabetes Care

What Is Tandem Diabetes Care's Debt?

As you can see below, at the end of March 2024, Tandem Diabetes Care had US$347.5m of debt, up from US$283.7m a year ago. Click the image for more detail. But on the other hand it also has US$467.8m in cash, leading to a US$120.3m net cash position.

How Strong Is Tandem Diabetes Care's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tandem Diabetes Care had liabilities of US$193.0m due within 12 months and liabilities of US$505.0m due beyond that. On the other hand, it had cash of US$467.8m and US$93.0m worth of receivables due within a year. So its liabilities total US$137.2m more than the combination of its cash and short-term receivables.

Since publicly traded Tandem Diabetes Care shares are worth a total of US$2.93b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. 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 Tandem Diabetes Care 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, Tandem Diabetes Care made a loss at the EBIT level, and saw its revenue drop to US$770m, which is a fall of 3.1%. We would much prefer see growth.

So How Risky Is Tandem Diabetes Care?

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 Tandem Diabetes Care had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$67m of cash and made a loss of US$141m. While this does make the company a bit risky, it's important to remember it has net cash of US$120.3m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Tandem Diabetes Care is showing 3 warning signs in our investment analysis , you should know about...

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.

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