TransAct Technologies (NASDAQ:TACT) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TransAct Technologies

What Is TransAct Technologies's Net Debt?

As you can see below, TransAct Technologies had US$2.25m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$12.3m in cash offsetting this, leading to net cash of US$10.1m.

How Strong Is TransAct Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TransAct Technologies had liabilities of US$13.6m due within 12 months and liabilities of US$1.15m due beyond that. Offsetting these obligations, it had cash of US$12.3m as well as receivables valued at US$9.82m due within 12 months. So it actually has US$7.36m 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.

It was also good to see that despite losing money on the EBIT line last year, TransAct Technologies turned things around in the last 12 months, delivering and EBIT of US$5.7m. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TransAct Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, TransAct Technologies recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case TransAct Technologies has US$10.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$4.6m. So is TransAct Technologies's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for TransAct Technologies (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.