Is Conformis (NASDAQ:CFMS) Using Debt Sensibly?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Conformis, Inc. (NASDAQ:CFMS) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Conformis
What Is Conformis's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Conformis had US$19.4m of debt in September 2019, down from US$29.7m, one year before. However, it does have US$29.4m in cash offsetting this, leading to net cash of US$10.00m.
How Strong Is Conformis's Balance Sheet?
The latest balance sheet data shows that Conformis had liabilities of US$17.1m due within a year, and liabilities of US$36.3m falling due after that. Offsetting these obligations, it had cash of US$29.4m as well as receivables valued at US$10.6m due within 12 months. So it has liabilities totalling US$13.3m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Conformis is worth US$57.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Conformis also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Conformis'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.
In the last year Conformis had negative earnings before interest and tax, and actually shrunk its revenue by 10%, to US$80m. We would much prefer see growth.
So How Risky Is Conformis?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Conformis had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$1.4m and booked a US$33m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$10.00m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Conformis , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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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