Is Conformis (NASDAQ:CFMS) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Conformis, Inc. (NASDAQ:CFMS) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Conformis

What Is Conformis's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Conformis had US$25.2m of debt, an increase on US$19.8m, over one year. However, it does have US$104.6m in cash offsetting this, leading to net cash of US$79.4m.

How Strong Is Conformis' Balance Sheet?

According to the last reported balance sheet, Conformis had liabilities of US$29.7m due within 12 months, and liabilities of US$29.0m due beyond 12 months. On the other hand, it had cash of US$104.6m and US$8.35m worth of receivables due within a year. So it can boast US$54.3m more liquid assets than total liabilities.

This surplus strongly suggests that Conformis has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Conformis 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 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.

Over 12 months, Conformis made a loss at the EBIT level, and saw its revenue drop to US$66m, which is a fall of 9.7%. That's not what we would hope to see.

So How Risky Is Conformis?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Conformis 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$24m and booked a US$26m accounting loss. But the saving grace is the US$79.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 4 warning signs with Conformis (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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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