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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Silk Road Medical, Inc (NASDAQ:SILK) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Silk Road Medical

What Is Silk Road Medical's Debt?

The chart below, which you can click on for greater detail, shows that Silk Road Medical had US$75.1m in debt in June 2023; about the same as the year before. But on the other hand it also has US$188.4m in cash, leading to a US$113.3m 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$24.1m falling due within a year, and liabilities of US$83.8m due beyond that. Offsetting these obligations, it had cash of US$188.4m as well as receivables valued at US$21.5m due within 12 months. So it can boast US$102.0m more liquid assets than total liabilities.

This surplus suggests that Silk Road Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Silk Road Medical boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Silk Road Medical 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.

Over 12 months, Silk Road Medical reported revenue of US$163m, which is a gain of 43%, 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. And over the same period it saw negative free cash outflow of US$33m and booked a US$53m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$113.3m. 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, Silk Road Medical may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Silk Road Medical you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.