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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Silk Road Medical, Inc (NASDAQ:SILK) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Silk Road Medical

What Is Silk Road Medical's Net Debt?

The chart below, which you can click on for greater detail, shows that Silk Road Medical had US$75.9m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$174.5m in cash, so it actually has US$98.6m net cash.

A Look At Silk Road Medical's Liabilities

According to the last reported balance sheet, Silk Road Medical had liabilities of US$21.3m due within 12 months, and liabilities of US$83.7m due beyond 12 months. On the other hand, it had cash of US$174.5m and US$27.2m worth of receivables due within a year. So it can boast US$96.6m 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. Simply put, the fact that Silk Road Medical 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 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.

In the last year Silk Road Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$185m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Silk Road Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$34m of cash and made a loss of US$53m. While this does make the company a bit risky, it's important to remember it has net cash of US$98.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Silk Road Medical'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Silk Road Medical you should be aware of.

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.