Is Conformis (NASDAQ:CFMS) A Risky Investment?

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, Conformis, Inc. (NASDAQ:CFMS) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Conformis

What Is Conformis's Net Debt?

As you can see below, Conformis had US$20.6m of debt at June 2021, down from US$24.7m a year prior. But on the other hand it also has US$108.3m in cash, leading to a US$87.7m net cash position.

How Strong Is Conformis' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Conformis had liabilities of US$15.3m due within 12 months and liabilities of US$27.7m due beyond that. Offsetting these obligations, it had cash of US$108.3m as well as receivables valued at US$24.5m due within 12 months. So it actually has US$89.8m more liquid assets than total liabilities.

This surplus suggests that Conformis is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Conformis has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Conformis improved its EBIT from a last year's loss to a positive US$7.3m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Conformis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Conformis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Conformis burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Conformis has net cash of US$87.7m, as well as more liquid assets than liabilities. So we are not troubled with Conformis's debt use. 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. Case in point: We've spotted 4 warning signs for Conformis you should be aware of, and 3 of them make us uncomfortable.

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.
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