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.' 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. As with many other companies PAVmed Inc. (NASDAQ:PAVM) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
What Is PAVmed's Debt?
As you can see below, at the end of June 2022, PAVmed had US$29.5m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$65.2m in cash, leading to a US$35.7m net cash position.
How Strong Is PAVmed's Balance Sheet?
We can see from the most recent balance sheet that PAVmed had liabilities of US$38.9m falling due within a year, and liabilities of US$2.18m due beyond that. On the other hand, it had cash of US$65.2m and US$89.0k worth of receivables due within a year. So it can boast US$24.2m more liquid assets than total liabilities.
This short term liquidity is a sign that PAVmed could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PAVmed has more cash than debt is arguably a good indication that 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 PAVmed's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year PAVmed managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is PAVmed?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PAVmed lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$62m and booked a US$72m accounting loss. Given it only has net cash of US$35.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with PAVmed (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.
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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.
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