Is Silk Road Medical (NASDAQ:SILK) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Silk Road Medical, Inc (NASDAQ:SILK) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Silk Road Medical Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Silk Road Medical had debt of US$47.7m, up from US$45.0m in one year. But it also has US$136.1m in cash to offset that, meaning it has US$88.3m net cash.

How Strong Is Silk Road Medical's Balance Sheet?

According to the last reported balance sheet, Silk Road Medical had liabilities of US$16.2m due within 12 months, and liabilities of US$52.3m due beyond 12 months. On the other hand, it had cash of US$136.1m and US$11.1m worth of receivables due within a year. So it can boast US$78.7m 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. 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 13%, to US$78m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 the fact is that over the last twelve months Silk Road Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$43m of cash and made a loss of US$48m. While this does make the company a bit risky, it's important to remember it has net cash of US$88.3m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Silk Road Medical that you should be aware of before investing here.

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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