Is Apollo Endosurgery (NASDAQ:APEN) Weighed On By Its Debt Load?

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 Apollo Endosurgery, Inc. (NASDAQ:APEN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Our analysis indicates that APEN is potentially overvalued!

What Is Apollo Endosurgery's Debt?

The chart below, which you can click on for greater detail, shows that Apollo Endosurgery had US$53.5m in debt in September 2022; about the same as the year before. But it also has US$66.9m in cash to offset that, meaning it has US$13.4m net cash.

How Strong Is Apollo Endosurgery's Balance Sheet?

The latest balance sheet data shows that Apollo Endosurgery had liabilities of US$16.5m due within a year, and liabilities of US$57.2m falling due after that. Offsetting these obligations, it had cash of US$66.9m as well as receivables valued at US$12.9m due within 12 months. So it can boast US$6.09m more liquid assets than total liabilities.

This state of affairs indicates that Apollo Endosurgery's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$419.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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$72m, which is a gain of 20%, 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 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$28m of cash and made a loss of US$41m. Given it only has net cash of US$13.4m, the company may need to raise more capital if it doesn't reach break-even 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Apollo Endosurgery you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.