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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, TG Therapeutics, Inc. (NASDAQ:TGTX) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is TG Therapeutics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 TG Therapeutics had US$101.6m of debt, an increase on US$96.8m, over one year. However, its balance sheet shows it holds US$209.8m in cash, so it actually has US$108.1m net cash.
A Look At TG Therapeutics' Liabilities
The latest balance sheet data shows that TG Therapeutics had liabilities of US$99.7m due within a year, and liabilities of US$113.5m falling due after that. Offsetting these obligations, it had cash of US$209.8m as well as receivables valued at US$65.0m due within 12 months. So it can boast US$61.6m more liquid assets than total liabilities.
This surplus suggests that TG Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TG Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, TG Therapeutics made a loss at the EBIT level, last year, but improved that to positive EBIT of US$48m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TG Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TG Therapeutics 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. Looking at the most recent year, TG Therapeutics recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that TG Therapeutics has net cash of US$108.1m, as well as more liquid assets than liabilities. So we are not troubled with TG Therapeutics's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - TG Therapeutics has 2 warning signs we think 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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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.