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. As with many other companies AtriCure, Inc. (NASDAQ:ATRC) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does AtriCure Carry?
As you can see below, AtriCure had US$61.5m of debt, at December 2021, 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$119.1m in cash, leading to a US$57.6m net cash position.
How Healthy Is AtriCure's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AtriCure had liabilities of US$56.4m due within 12 months and liabilities of US$75.1m due beyond that. On the other hand, it had cash of US$119.1m and US$33.0m worth of receivables due within a year. So it actually has US$20.6m more liquid assets than total liabilities.
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$2.94b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that AtriCure 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 AtriCure'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 AtriCure wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$274m. With any luck the company will be able to grow its way to profitability.
So How Risky Is AtriCure?
Although AtriCure had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$50m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 33% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. For instance, we've identified 4 warning signs for AtriCure (1 makes us a bit uncomfortable) you should be aware of.
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.
What are the risks and opportunities for AtriCure?
Trading at 0.7% below our estimate of its fair value
Revenue is forecast to grow 14.8% per year
Currently unprofitable and not forecast to become profitable over the next 3 years
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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.