Is SI-BONE (NASDAQ:SIBN) Using Too Much Debt?

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 SI-BONE, Inc. (NASDAQ:SIBN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SI-BONE

What Is SI-BONE's Net Debt?

The chart below, which you can click on for greater detail, shows that SI-BONE had US$36.0m in debt in June 2023; about the same as the year before. However, it does have US$169.4m in cash offsetting this, leading to net cash of US$133.5m.

How Healthy Is SI-BONE's Balance Sheet?

We can see from the most recent balance sheet that SI-BONE had liabilities of US$18.2m falling due within a year, and liabilities of US$38.2m due beyond that. Offsetting these obligations, it had cash of US$169.4m as well as receivables valued at US$20.4m due within 12 months. So it can boast US$133.4m more liquid assets than total liabilities.

This surplus suggests that SI-BONE is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SI-BONE has more cash than debt is arguably a good indication that it can manage its debt safely. 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 SI-BONE'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.

In the last year SI-BONE wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$124m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is SI-BONE?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year SI-BONE had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$49m and booked a US$48m accounting loss. But the saving grace is the US$133.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. SI-BONE'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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that SI-BONE is showing 3 warning signs in our investment analysis , you should know about...

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.