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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Silk Road Medical, Inc (NASDAQ:SILK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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$75.1m in debt in June 2023; about the same as the year before. But on the other hand it also has US$188.4m in cash, leading to a US$113.3m net cash position.

A Look At Silk Road Medical's Liabilities

The latest balance sheet data shows that Silk Road Medical had liabilities of US$24.1m due within a year, and liabilities of US$83.8m falling due after that. Offsetting these obligations, it had cash of US$188.4m as well as receivables valued at US$21.5m due within 12 months. So it can boast US$102.0m more liquid assets than total liabilities.

This luscious liquidity implies that Silk Road Medical's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 43%, to US$163m. With any luck the company will be able to grow its way to profitability.

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. And over the same period it saw negative free cash outflow of US$27m and booked a US$53m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$113.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. We've identified 5 warning signs with Silk Road Medical (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.