Is Silk Road Medical (NASDAQ:SILK) Using Debt Sensibly?

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.' 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. 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.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Silk Road Medical

What Is Silk Road Medical's Net Debt?

As you can see below, at the end of September 2021, Silk Road Medical had US$48.7m of debt, up from US$45.2m a year ago. Click the image for more detail. But on the other hand it also has US$122.8m in cash, leading to a US$74.1m net cash position.

A Look At Silk Road Medical's Liabilities

According to the last reported balance sheet, Silk Road Medical had liabilities of US$20.9m due within 12 months, and liabilities of US$56.4m due beyond 12 months. Offsetting these obligations, it had cash of US$122.8m as well as receivables valued at US$11.0m due within 12 months. So it actually has US$56.4m 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! 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'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$94m, which is a gain of 30%, 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 Silk Road Medical?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$44m and booked a US$52m accounting loss. But the saving grace is the US$74.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Silk Road Medical .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.