Health Check: How Prudently Does Alpha Teknova (NASDAQ:TKNO) 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. We note that Alpha Teknova, Inc. (NASDAQ:TKNO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alpha Teknova

How Much Debt Does Alpha Teknova Carry?

The image below, which you can click on for greater detail, shows that Alpha Teknova had debt of US$13.2m at the end of September 2023, a reduction from US$16.9m over a year. But on the other hand it also has US$32.1m in cash, leading to a US$18.9m net cash position.

How Healthy Is Alpha Teknova's Balance Sheet?

The latest balance sheet data shows that Alpha Teknova had liabilities of US$8.34m due within a year, and liabilities of US$30.4m falling due after that. Offsetting this, it had US$32.1m in cash and US$5.16m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.49m.

Having regard to Alpha Teknova's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$119.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Alpha Teknova 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 Alpha Teknova'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, Alpha Teknova made a loss at the EBIT level, and saw its revenue drop to US$37m, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is Alpha Teknova?

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 Alpha Teknova lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$36m and booked a US$39m accounting loss. With only US$18.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Alpha Teknova is showing 4 warning signs in our investment analysis , you should know about...

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.