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.' 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. Importantly, Silk Road Medical, Inc (NASDAQ:SILK) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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.

Check out our latest analysis for Silk Road Medical

What Is Silk Road Medical's Net Debt?

As you can see below, at the end of June 2022, Silk Road Medical had US$74.0m of debt, up from US$48.6m a year ago. Click the image for more detail. But on the other hand it also has US$108.9m in cash, leading to a US$34.8m net cash position.

How Healthy Is Silk Road Medical's Balance Sheet?

We can see from the most recent balance sheet that Silk Road Medical had liabilities of US$21.2m falling due within a year, and liabilities of US$81.5m due beyond that. Offsetting this, it had US$108.9m in cash and US$15.8m in receivables that were due within 12 months. So it actually has US$22.0m more liquid assets than total liabilities.

This state of affairs indicates that Silk Road Medical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.41b company is short on cash, but still worth keeping an eye on the balance sheet. 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. There's no doubt that we learn most about debt from the balance sheet. 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 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 27%, to US$114m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$50m of cash and made a loss of US$61m. But the saving grace is the US$34.8m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Silk Road Medical you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.