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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. We can see that AtriCure, Inc. (NASDAQ:ATRC) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
How Much Debt Does AtriCure Carry?
The image below, which you can click on for greater detail, shows that at September 2019 AtriCure had debt of US$59.5m, up from US$40.1m in one year. However, it does have US$79.7m in cash offsetting this, leading to net cash of US$20.2m.
A Look At AtriCure's Liabilities
The latest balance sheet data shows that AtriCure had liabilities of US$44.3m due within a year, and liabilities of US$258.3m falling due after that. Offsetting this, it had US$79.7m in cash and US$26.8m in receivables that were due within 12 months. So its liabilities total US$196.0m more than the combination of its cash and short-term receivables.
Given AtriCure has a market capitalization of US$1.58b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, AtriCure boasts net cash, so it's fair to say it does not have a heavy debt load! 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 AtriCure'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, AtriCure reported revenue of US$222m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is AtriCure?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months AtriCure lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$20m and booked a US$23m accounting loss. But the saving grace is the US$20.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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, we've discovered 3 warning signs for AtriCure that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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