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. As with many other companies Treace Medical Concepts, Inc. (NASDAQ:TMCI) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Treace Medical Concepts Carry?

As you can see below, Treace Medical Concepts had US$53.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$82.8m in cash to offset that, meaning it has US$29.6m net cash.

A Look At Treace Medical Concepts' Liabilities

We can see from the most recent balance sheet that Treace Medical Concepts had liabilities of US$38.3m falling due within a year, and liabilities of US$69.8m due beyond that. On the other hand, it had cash of US$82.8m and US$24.8m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Treace Medical Concepts' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$464.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Treace Medical Concepts boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Treace Medical Concepts'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, Treace Medical Concepts reported revenue of US$203m, which is a gain of 16%, 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 the fact is that over the last twelve months Treace Medical Concepts lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$43m and booked a US$62m accounting loss. However, it has net cash of US$29.6m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Treace Medical Concepts is showing 2 warning signs in our investment analysis , you should know about...

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.