The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Glaukos Corporation (NYSE:GKOS) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Glaukos's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Glaukos had debt of US$181.6m, up from none in one year. However, it does have US$394.9m in cash offsetting this, leading to net cash of US$213.3m.
How Healthy Is Glaukos's Balance Sheet?
The latest balance sheet data shows that Glaukos had liabilities of US$54.8m due within a year, and liabilities of US$278.5m falling due after that. Offsetting this, it had US$394.9m in cash and US$26.7m in receivables that were due within 12 months. So it can boast US$88.4m more liquid assets than total liabilities.
This surplus suggests that Glaukos has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Glaukos boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Glaukos can strengthen its balance sheet over time. 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 Glaukos's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Glaukos?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Glaukos had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$18.5m of cash and made a loss of US$70.9m. But the saving grace is the US$213.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. Take risks, for example - Glaukos has 2 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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. 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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