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Tandem Group (LON:TND) Has A Pretty Healthy Balance Sheet

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 note that Tandem Group plc (LON:TND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tandem Group

What Is Tandem Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Tandem Group had debt of UK£3.71m, up from UK£1.03m in one year. However, its balance sheet shows it holds UK£5.85m in cash, so it actually has UK£2.14m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Tandem Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tandem Group had liabilities of UK£9.98m due within 12 months and liabilities of UK£6.08m due beyond that. Offsetting these obligations, it had cash of UK£5.85m as well as receivables valued at UK£8.53m due within 12 months. So its liabilities total UK£1.67m more than the combination of its cash and short-term receivables.

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Since publicly traded Tandem Group shares are worth a total of UK£34.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Tandem Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Tandem Group grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tandem Group'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 company can only pay off debt with cold hard cash, not accounting profits. Tandem Group 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 most recent three years, Tandem Group recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Tandem Group's liabilities, but we can be reassured by the fact it has has net cash of UK£2.14m. And we liked the look of last year's 16% year-on-year EBIT growth. So is Tandem Group'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Tandem Group (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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