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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ClearPoint Neuro, Inc. (NASDAQ:CLPT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ClearPoint Neuro

What Is ClearPoint Neuro's Debt?

As you can see below, ClearPoint Neuro had US$9.92m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$26.5m in cash, leading to a US$16.5m net cash position.

A Look At ClearPoint Neuro's Liabilities

According to the last reported balance sheet, ClearPoint Neuro had liabilities of US$6.20m due within 12 months, and liabilities of US$14.0m due beyond 12 months. On the other hand, it had cash of US$26.5m and US$2.80m worth of receivables due within a year. So it actually has US$9.03m more liquid assets than total liabilities.

This surplus suggests that ClearPoint Neuro has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ClearPoint Neuro boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ClearPoint Neuro can strengthen its balance sheet over time. 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$22m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 the fact is that over the last twelve months ClearPoint Neuro lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$19m and booked a US$21m accounting loss. But the saving grace is the US$16.5m 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. 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. We've identified 1 warning sign with ClearPoint Neuro , and understanding them should be part of your investment process.

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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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.