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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.' 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. We note that Silk Road Medical, Inc (NASDAQ:SILK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Silk Road Medical's Net Debt?
As you can see below, Silk Road Medical had US$45.1m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$157.9m in cash offsetting this, leading to net cash of US$112.8m.
How Healthy Is Silk Road Medical's Balance Sheet?
We can see from the most recent balance sheet that Silk Road Medical had liabilities of US$11.7m falling due within a year, and liabilities of US$48.8m due beyond that. Offsetting these obligations, it had cash of US$157.9m as well as receivables valued at US$7.75m due within 12 months. So it actually has US$105.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Silk Road Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Silk Road Medical 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 it is future earnings, more than anything, that will determine Silk Road Medical's ability to maintain a healthy balance sheet going forward. 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, Silk Road Medical reported revenue of US$70m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Silk Road Medical?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Silk Road Medical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$36m and booked a US$37m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$112.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Silk Road Medical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Silk Road Medical is showing 2 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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