Is NeuroPace (NASDAQ:NPCE) Weighed On By Its Debt Load?

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.' 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. We can see that NeuroPace, Inc. (NASDAQ:NPCE) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for NeuroPace

What Is NeuroPace's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 NeuroPace had debt of US$57.0m, up from US$52.9m in one year. However, its balance sheet shows it holds US$66.5m in cash, so it actually has US$9.50m net cash.

How Healthy Is NeuroPace's Balance Sheet?

According to the last reported balance sheet, NeuroPace had liabilities of US$16.2m due within 12 months, and liabilities of US$70.8m due beyond 12 months. Offsetting this, it had US$66.5m in cash and US$12.3m in receivables that were due within 12 months. So it has liabilities totalling US$8.23m more than its cash and near-term receivables, combined.

Having regard to NeuroPace's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$411.6m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, NeuroPace also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NeuroPace'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.

Over 12 months, NeuroPace reported revenue of US$65m, which is a gain of 44%, 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 NeuroPace?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NeuroPace lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$20m and booked a US$33m accounting loss. But the saving grace is the US$9.50m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, NeuroPace may be on a path to profitability. 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. We've identified 2 warning signs with NeuroPace , and understanding them should be part of your investment process.

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.