We Think Conformis (NASDAQ:CFMS) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Conformis, Inc. (NASDAQ:CFMS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Conformis

What Is Conformis's Debt?

As you can see below, Conformis had US$20.8m of debt at September 2021, down from US$24.8m a year prior. However, its balance sheet shows it holds US$97.1m in cash, so it actually has US$76.3m net cash.

A Look At Conformis' Liabilities

We can see from the most recent balance sheet that Conformis had liabilities of US$15.2m falling due within a year, and liabilities of US$27.6m due beyond that. Offsetting these obligations, it had cash of US$97.1m as well as receivables valued at US$24.6m due within 12 months. So it can boast US$78.8m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Conformis boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Conformis improved its EBIT from a last year's loss to a positive US$3.0m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Conformis'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Conformis has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Conformis burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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$76.3m, as well as more liquid assets than liabilities. So we don't have any problem with Conformis's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Conformis has 5 warning signs (and 3 which are concerning) we think you should know about.

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.