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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, Neuronetics, Inc. (NASDAQ:STIM) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Neuronetics Carry?
The chart below, which you can click on for greater detail, shows that Neuronetics had US$30.8m in debt in June 2019; about the same as the year before. However, its balance sheet shows it holds US$89.6m in cash, so it actually has US$58.9m net cash.
A Look At Neuronetics's Liabilities
The latest balance sheet data shows that Neuronetics had liabilities of US$16.6m due within a year, and liabilities of US$33.0m falling due after that. On the other hand, it had cash of US$89.6m and US$7.80m worth of receivables due within a year. So it can boast US$47.8m more liquid assets than total liabilities.
It's good to see that Neuronetics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Neuronetics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neuronetics 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.
In the last year Neuronetics managed to grow its revenue by 28%, to US$59m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Neuronetics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Neuronetics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$25m of cash and made a loss of US$26m. But the saving grace is the US$90m on the balance sheet. That kitty means the company can keep spending for growth for at least three years, at current rates. With very solid revenue growth in the last year, Neuronetics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Neuronetics insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.