We Think Surmodics (NASDAQ:SRDX) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. As with many other companies Surmodics, Inc. (NASDAQ:SRDX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Surmodics

How Much Debt Does Surmodics Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Surmodics had US$29.4m of debt, an increase on US$10.0m, over one year. However, it does have US$44.6m in cash offsetting this, leading to net cash of US$15.2m.

A Look At Surmodics' Liabilities

The latest balance sheet data shows that Surmodics had liabilities of US$32.0m due within a year, and liabilities of US$44.4m falling due after that. Offsetting these obligations, it had cash of US$44.6m as well as receivables valued at US$23.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.21m.

Having regard to Surmodics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$489.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Surmodics boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Surmodics made a loss at the EBIT level, last year, but improved that to positive EBIT of US$1.4m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Surmodics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Surmodics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Surmodics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Surmodics has US$15.2m in net cash. And it impressed us with free cash flow of US$4.0m, being 279% of its EBIT. So we don't have any problem with Surmodics's use of debt. Even though Surmodics lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.