OrthoPediatrics (NASDAQ:KIDS) Is Making Moderate Use Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies OrthoPediatrics Corp. (NASDAQ:KIDS) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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 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 think about a company's use of debt, we first look at cash and debt together.

What Is OrthoPediatrics's Debt?

The image below, which you can click on for greater detail, shows that at September 2025 OrthoPediatrics had debt of US$99.3m, up from US$72.7m in one year. However, because it has a cash reserve of US$57.7m, its net debt is less, at about US$41.6m.

How Strong Is OrthoPediatrics' Balance Sheet?

According to the last reported balance sheet, OrthoPediatrics had liabilities of US$33.2m due within 12 months, and liabilities of US$110.9m due beyond 12 months. Offsetting these obligations, it had cash of US$57.7m as well as receivables valued at US$51.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$35.2m.

Since publicly traded OrthoPediatrics shares are worth a total of US$447.6m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine OrthoPediatrics'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.

View our latest analysis for OrthoPediatrics

In the last year OrthoPediatrics wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$227m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, OrthoPediatrics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$32m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$29m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 1 warning sign with OrthoPediatrics , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.