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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Silk Road Medical, Inc (NASDAQ:SILK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for Silk Road Medical

What Is Silk Road Medical's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Silk Road Medical had debt of US$48.7m, up from US$45.2m in one year. But it also has US$122.8m in cash to offset that, meaning it has US$74.1m net cash.

How Healthy Is Silk Road Medical's Balance Sheet?

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 can boast 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. 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'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. 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 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$44m and booked a US$52m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$74.1m. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Silk Road Medical , and understanding them should be part of your investment process.

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.

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.

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