Is OrthoPediatrics (NASDAQ:KIDS) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that OrthoPediatrics Corp. (NASDAQ:KIDS) does use debt in its business. But should shareholders be worried about its use of debt?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for OrthoPediatrics

What Is OrthoPediatrics's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 OrthoPediatrics had debt of US$32.0m, up from US$1.11m in one year. However, its balance sheet shows it holds US$51.2m in cash, so it actually has US$19.2m net cash.

A Look At OrthoPediatrics' Liabilities

Zooming in on the latest balance sheet data, we can see that OrthoPediatrics had liabilities of US$31.2m due within 12 months and liabilities of US$72.5m due beyond that. On the other hand, it had cash of US$51.2m and US$25.4m worth of receivables due within a year. So its liabilities total US$27.1m more than the combination of its cash and short-term receivables.

Since publicly traded OrthoPediatrics shares are worth a total of US$1.16b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, OrthoPediatrics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OrthoPediatrics 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.

In the last year OrthoPediatrics wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$106m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is OrthoPediatrics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OrthoPediatrics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$33m of cash and made a loss of US$12m. However, it has net cash of US$19.2m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with OrthoPediatrics , 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.