Is Apollo Endosurgery (NASDAQ:APEN) Using Debt Sensibly?

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 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. As with many other companies Apollo Endosurgery, Inc. (NASDAQ:APEN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Apollo Endosurgery

How Much Debt Does Apollo Endosurgery Carry?

You can click the graphic below for the historical numbers, but it shows that Apollo Endosurgery had US$53.0m of debt in December 2021, down from US$57.2m, one year before. But on the other hand it also has US$90.7m in cash, leading to a US$37.7m net cash position.

How Healthy Is Apollo Endosurgery's Balance Sheet?

We can see from the most recent balance sheet that Apollo Endosurgery had liabilities of US$14.5m falling due within a year, and liabilities of US$55.8m due beyond that. On the other hand, it had cash of US$90.7m and US$10.1m worth of receivables due within a year. So it actually has US$30.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Apollo Endosurgery could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Apollo Endosurgery 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 Apollo Endosurgery can strengthen its balance sheet over time. 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, Apollo Endosurgery reported revenue of US$63m, which is a gain of 50%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Apollo Endosurgery?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Apollo Endosurgery 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$16m and booked a US$25m accounting loss. Given it only has net cash of US$37.7m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Apollo Endosurgery may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Apollo Endosurgery has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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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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.