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.' 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 AtriCure, Inc. (NASDAQ:ATRC) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is AtriCure's Net Debt?
As you can see below, AtriCure had US$60.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$233.1m in cash, leading to a US$173.1m net cash position.
How Strong Is AtriCure's Balance Sheet?
According to the last reported balance sheet, AtriCure had liabilities of US$44.8m due within 12 months, and liabilities of US$245.5m due beyond 12 months. On the other hand, it had cash of US$233.1m and US$25.4m worth of receivables due within a year. So its liabilities total US$31.7m more than the combination of its cash and short-term receivables.
Having regard to AtriCure's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.55b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, AtriCure also has more cash than debt, so we're pretty confident 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 AtriCure'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, AtriCure made a loss at the EBIT level, and saw its revenue drop to US$210m, which is a fall of 5.5%. That's not what we would hope to see.
So How Risky Is AtriCure?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months AtriCure lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$36m of cash and made a loss of US$46m. But at least it has US$173.1m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 3 warning signs we've spotted with AtriCure .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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AtriCure, Inc. develops, manufactures, and sells devices for the surgical ablation of cardiac tissue and systems, and intercostal nerves to medical centers in the United States, Europe, Asia, and internationally.
Excellent balance sheet and overvalued.