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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Silk Road Medical, Inc (NASDAQ:SILK) does have debt on its balance sheet. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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$48.7m in debt in March 2022; about the same as the year before. However, it does have US$93.6m in cash offsetting this, leading to net cash of US$44.9m.

How Strong Is Silk Road Medical's Balance Sheet?

The latest balance sheet data shows that Silk Road Medical had liabilities of US$29.5m due within a year, and liabilities of US$45.8m falling due after that. On the other hand, it had cash of US$93.6m and US$13.9m worth of receivables due within a year. So it can boast US$32.2m 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! When analysing debt levels, the balance sheet is the obvious place to start. 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$107m, which is a gain of 37%, 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 in the last year Silk Road Medical 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$48m and booked a US$56m accounting loss. But the saving grace is the US$44.9m 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. 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. For instance, we've identified 2 warning signs for Silk Road Medical that 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.