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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. importantly, Tandem Diabetes Care, Inc. (NASDAQ:TNDM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Tandem Diabetes Care Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Tandem Diabetes Care had debt of US$281.5m, up from US$203.0m in one year. But on the other hand it also has US$623.8m in cash, leading to a US$342.3m net cash position.

NasdaqGM:TNDM Debt to Equity History April 17th 2022

A Look At Tandem Diabetes Care’s Liabilities

The latest balance sheet data shows that Tandem Diabetes Care had liabilities of US$131.9m due within a year, and liabilities of US$340.2m falling due after that. Offsetting this, it had US$623.8m in cash and US$110.7m in receivables that were due within 12 months. So it can boast US$262.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Tandem Diabetes Care could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tandem Diabetes Care boasts net cash, so it’s fair to say it does not have a heavy debt load!

Notably, Tandem Diabetes Care made a loss at the EBIT level last year, but improved that to positive EBIT of US$23m in the last twelve months. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tandem Diabetes Care’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 Tandem Diabetes Care 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. Over the last year, Tandem Diabetes Care actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

summing up

While it is always sensitive to investigate a company’s debt, in this case Tandem Diabetes Care has US$342.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 388% of that EBIT to free cash flow, bringing in US$88m. So we don’t think Tandem Diabetes Care’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we’ve spotted with Tandem Diabetes Care .

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.

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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