These 4 Measures Indicate That Tandem Group (LON:TND) Is Using Debt Reasonably Well

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Simply Wall St

Wed, May 11, 2022, 12:16 AM 4 min read

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Tandem Group plc (LON:TND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tandem Group

What Is Tandem Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Tandem Group had debt of UK£4.04m, up from UK£2.26m in one year. But on the other hand it also has UK£6.37m in cash, leading to a UK£2.33m net cash position.

debt-equity-history-analysis — AIM:TND Debt to Equity History May 11th 2022

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£12.6m due within 12 months and liabilities of UK£4.12m due beyond that. Offsetting this, it had UK£6.37m in cash and UK£10.00m in receivables that were due within 12 months. So its liabilities total UK£346.0k more than the combination of its cash and short-term receivables.

Of course, Tandem Group has a market capitalization of UK£17.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Tandem Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Tandem Group has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Tandem Group recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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£2.33m. And we liked the look of last year's 21% year-on-year EBIT growth. So is Tandem Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Tandem Group (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.