Is ClearPoint Neuro (NASDAQ:CLPT) Using Debt In A Risky Way?

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. As with many other companies ClearPoint Neuro, Inc. (NASDAQ:CLPT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ClearPoint Neuro

How Much Debt Does ClearPoint Neuro Carry?

The image below, which you can click on for greater detail, shows that ClearPoint Neuro had debt of US$9.84m at the end of December 2021, a reduction from US$21.3m over a year. However, it does have US$54.1m in cash offsetting this, leading to net cash of US$44.3m.

How Strong Is ClearPoint Neuro's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ClearPoint Neuro had liabilities of US$4.75m due within 12 months and liabilities of US$12.0m due beyond that. On the other hand, it had cash of US$54.1m and US$2.34m worth of receivables due within a year. So it actually has US$39.7m more liquid assets than total liabilities.

This surplus suggests that ClearPoint Neuro 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. Succinctly put, ClearPoint Neuro boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ClearPoint Neuro'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, ClearPoint Neuro reported revenue of US$16m, which is a gain of 27%, 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 ClearPoint Neuro?

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 ClearPoint Neuro had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$13m of cash and made a loss of US$14m. But the saving grace is the US$44.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. ClearPoint Neuro's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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. For instance, we've identified 3 warning signs for ClearPoint Neuro (1 is potentially serious) you should be aware of.

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.