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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.' 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. As with many other companies Nevro Corp. (NYSE:NVRO) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Nevro's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Nevro had US$301.8m of debt, an increase on US$156.3m, over one year. However, it does have US$562.3m in cash offsetting this, leading to net cash of US$260.5m.
How Strong Is Nevro's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nevro had liabilities of US$220.8m due within 12 months and liabilities of US$158.0m due beyond that. Offsetting these obligations, it had cash of US$562.3m as well as receivables valued at US$56.7m due within 12 months. So it can boast US$240.3m more liquid assets than total liabilities.
This surplus suggests that Nevro has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nevro 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 ultimately the future profitability of the business will decide if Nevro 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.
Over 12 months, Nevro made a loss at the EBIT level, and saw its revenue drop to US$358m, which is a fall of 5.5%. We would much prefer see growth.
So How Risky Is Nevro?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Nevro had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$43m of cash and made a loss of US$98m. But the saving grace is the US$260.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 3 warning signs we've spotted with Nevro .
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.
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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