Is Neuronetics (NASDAQ:STIM) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Neuronetics, Inc. (NASDAQ:STIM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Neuronetics

What Is Neuronetics's Net Debt?

As you can see below, Neuronetics had US$35.4m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$80.8m in cash, leading to a US$45.4m net cash position.

How Strong Is Neuronetics' Balance Sheet?

We can see from the most recent balance sheet that Neuronetics had liabilities of US$13.2m falling due within a year, and liabilities of US$40.2m due beyond that. Offsetting these obligations, it had cash of US$80.8m as well as receivables valued at US$10.5m due within 12 months. So it can boast US$38.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Neuronetics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Neuronetics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Neuronetics'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.

In the last year Neuronetics wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$57m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Neuronetics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Neuronetics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$34m of cash and made a loss of US$34m. But at least it has US$45.4m on the balance sheet to spend on growth, near-term. 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 instance, we've identified 5 warning signs for Neuronetics that you should be aware of.

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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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.