Is AtriCure (NASDAQ:ATRC) Using Debt In A Risky Way?

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 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. Importantly, AtriCure, Inc. (NASDAQ:ATRC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AtriCure

What Is AtriCure's Net Debt?

As you can see below, AtriCure had US$60.5m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$133.0m in cash, so it actually has US$72.5m net cash.

How Strong Is AtriCure's Balance Sheet?

We can see from the most recent balance sheet that AtriCure had liabilities of US$82.5m falling due within a year, and liabilities of US$54.9m due beyond that. Offsetting these obligations, it had cash of US$133.0m as well as receivables valued at US$51.5m due within 12 months. So it can boast US$47.1m more liquid assets than total liabilities.

This short term liquidity is a sign that AtriCure could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AtriCure has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of US$381m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is AtriCure?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year AtriCure 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$13m and booked a US$25m accounting loss. However, it has net cash of US$72.5m, so it has a bit of time before it will need more capital. AtriCure's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with AtriCure (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.