Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ShockWave Medical, Inc. (NASDAQ:SWAV) does have debt on its balance sheet. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ShockWave Medical Carry?
The image below, which you can click on for greater detail, shows that at June 2019 ShockWave Medical had debt of US$15.3m, up from none in one year. However, its balance sheet shows it holds US$125.1m in cash, so it actually has US$109.9m net cash.
How Strong Is ShockWave Medical's Balance Sheet?
We can see from the most recent balance sheet that ShockWave Medical had liabilities of US$15.4m falling due within a year, and liabilities of US$12.0m due beyond that. On the other hand, it had cash of US$125.1m and US$5.24m worth of receivables due within a year. So it can boast US$103.0m more liquid assets than total liabilities.
This surplus suggests that ShockWave Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ShockWave Medical has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ShockWave Medical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ShockWave Medical managed to grow its revenue by 273%, to US$26m. That's virtually the hole-in-one of revenue growth!
So How Risky Is ShockWave Medical?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that ShockWave Medical had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$47m and booked a US$45m accounting loss. But the saving grace is the US$125m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, ShockWave Medical's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like ShockWave Medical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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