Is Conformis (NASDAQ:CFMS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Conformis

What Is Conformis's Debt?

As you can see below, at the end of September 2020, Conformis had US$24.8m of debt, up from US$19.4m a year ago. Click the image for more detail. However, it does have US$32.9m in cash offsetting this, leading to net cash of US$8.06m.

How Healthy Is Conformis' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Conformis had liabilities of US$32.3m due within 12 months and liabilities of US$28.9m due beyond that. Offsetting these obligations, it had cash of US$32.9m as well as receivables valued at US$12.7m due within 12 months. So its liabilities total US$15.6m more than the combination of its cash and short-term receivables.

Given Conformis has a market capitalization of US$89.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Conformis 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 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$72m, which is a fall of 9.6%. We would much prefer see growth.

So How Risky Is Conformis?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Conformis had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$22m and booked a US$23m accounting loss. But the saving grace is the US$8.06m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Conformis that you should be aware of before investing here.

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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