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 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?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Nevro's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Nevro had debt of US$156.3m, up from US$148.6m in one year. However, its balance sheet shows it holds US$233.9m in cash, so it actually has US$77.7m net cash.
A Look At Nevro's Liabilities
The latest balance sheet data shows that Nevro had liabilities of US$66.2m due within a year, and liabilities of US$180.2m falling due after that. Offsetting this, it had US$233.9m in cash and US$67.1m in receivables that were due within 12 months. So it can boast US$54.5m 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. Succinctly put, Nevro 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 Nevro can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Nevro reported revenue of US$379m, which is a gain of 4.2%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Nevro?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Nevro had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$37m and booked a US$93m accounting loss. But the saving grace is the US$234m on the balance sheet. That means it could keep spending at its current rate for more than five years. 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. For riskier companies like Nevro I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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