Is Silk Road Medical (NASDAQ:SILK) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Silk Road Medical, Inc (NASDAQ:SILK) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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

Check out our latest analysis for Silk Road Medical

What Is Silk Road Medical's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Silk Road Medical had debt of US$74.6m, up from US$48.7m in one year. But on the other hand it also has US$213.7m in cash, leading to a US$139.1m net cash position.

A Look At Silk Road Medical's Liabilities

We can see from the most recent balance sheet that Silk Road Medical had liabilities of US$24.5m falling due within a year, and liabilities of US$81.3m due beyond that. Offsetting this, it had US$213.7m in cash and US$18.0m in receivables that were due within 12 months. So it actually has US$125.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Silk Road Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Silk Road Medical boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Silk Road Medical'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, Silk Road Medical reported revenue of US$139m, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Silk Road Medical?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Silk Road Medical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$38m of cash and made a loss of US$55m. While this does make the company a bit risky, it's important to remember it has net cash of US$139.1m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Silk Road Medical may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Silk Road Medical is showing 3 warning signs in our investment analysis , you should know about...

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.