Is TransAct Technologies (NASDAQ:TACT) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that TransAct Technologies Incorporated (NASDAQ:TACT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TransAct Technologies

What Is TransAct Technologies's Debt?

The chart below, which you can click on for greater detail, shows that TransAct Technologies had US$2.25m in debt in March 2024; about the same as the year before. But on the other hand it also has US$10.6m in cash, leading to a US$8.38m net cash position.

How Strong Is TransAct Technologies' Balance Sheet?

The latest balance sheet data shows that TransAct Technologies had liabilities of US$12.5m due within a year, and liabilities of US$879.0k falling due after that. Offsetting these obligations, it had cash of US$10.6m as well as receivables valued at US$7.78m due within 12 months. So it actually has US$5.06m more liquid assets than total liabilities.

This surplus suggests that TransAct Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TransAct Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that TransAct Technologies's EBIT was down 66% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TransAct Technologies'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While TransAct Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, TransAct Technologies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case TransAct Technologies has US$8.38m in net cash and a decent-looking balance sheet. So while TransAct Technologies does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 5 warning signs for TransAct Technologies you should be aware of, and 1 of them is potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com