Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Treace Medical Concepts, Inc. (NASDAQ:TMCI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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.

View our latest analysis for Treace Medical Concepts

What Is Treace Medical Concepts's Net Debt?

The chart below, which you can click on for greater detail, shows that Treace Medical Concepts had US$53.2m in debt in June 2024; about the same as the year before. But it also has US$95.0m in cash to offset that, meaning it has US$41.9m net cash.

How Healthy Is Treace Medical Concepts' Balance Sheet?

According to the last reported balance sheet, Treace Medical Concepts had liabilities of US$44.4m due within 12 months, and liabilities of US$69.5m due beyond 12 months. On the other hand, it had cash of US$95.0m and US$26.5m worth of receivables due within a year. So it actually has US$7.56m more liquid assets than total liabilities.

This short term liquidity is a sign that Treace Medical Concepts could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Treace Medical Concepts boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Treace Medical Concepts'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.

Over 12 months, Treace Medical Concepts reported revenue of US$199m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Treace Medical Concepts?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Treace Medical Concepts had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$42m of cash and made a loss of US$64m. However, it has net cash of US$41.9m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 1 warning sign for Treace Medical Concepts that you should be aware of.

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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