Is Apollo Endosurgery (NASDAQ:APEN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Apollo Endosurgery, Inc. (NASDAQ:APEN) does have debt on its balance sheet. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Apollo Endosurgery

What Is Apollo Endosurgery's Debt?

The chart below, which you can click on for greater detail, shows that Apollo Endosurgery had US$53.3m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$74.7m in cash, so it actually has US$21.4m net cash.

How Healthy Is Apollo Endosurgery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apollo Endosurgery had liabilities of US$16.4m due within 12 months and liabilities of US$56.2m due beyond that. Offsetting this, it had US$74.7m in cash and US$12.5m in receivables that were due within 12 months. So it actually has US$14.7m 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. Simply put, the fact that Apollo Endosurgery has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Apollo Endosurgery'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 Apollo Endosurgery wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$68m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Apollo Endosurgery?

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 Apollo Endosurgery 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$36m. With only US$21.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Apollo Endosurgery's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Apollo Endosurgery , and understanding them should be part of your investment process.

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.