Is EBR Systems (ASX:EBR) Using Debt In A Risky Way?

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.' 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. Importantly, EBR Systems, Inc. (ASX:EBR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EBR Systems

What Is EBR Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 EBR Systems had US$39.7m of debt, an increase on US$19.4m, over one year. However, it does have US$72.3m in cash offsetting this, leading to net cash of US$32.6m.

How Strong Is EBR Systems' Balance Sheet?

According to the last reported balance sheet, EBR Systems had liabilities of US$6.45m due within 12 months, and liabilities of US$41.4m due beyond 12 months. Offsetting this, it had US$72.3m in cash and US$230.7k in receivables that were due within 12 months. So it actually has US$24.7m more liquid assets than total liabilities.

This surplus suggests that EBR Systems is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that EBR Systems 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 EBR Systems'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.

Given its lack of meaningful operating revenue, EBR Systems shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is EBR Systems?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year EBR Systems had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$33m of cash and made a loss of US$35m. However, it has net cash of US$32.6m, so it has a bit of time before it will need more capital. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for EBR Systems (of which 2 are significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.