Is Neuronetics (NASDAQ:STIM) Weighed On By Its Debt Load?

By
Simply Wall St
Published
January 19, 2022
NasdaqGM:STIM
Source: Shutterstock

Warren Buffett famously said, '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 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Neuronetics

How Much Debt Does Neuronetics Carry?

As you can see below, Neuronetics had US$35.1m of debt, at September 2021, 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$99.4m in cash, leading to a US$64.3m net cash position.

debt-equity-history-analysis
NasdaqGM:STIM Debt to Equity History January 19th 2022

A Look At Neuronetics' Liabilities

The latest balance sheet data shows that Neuronetics had liabilities of US$47.8m due within a year, and liabilities of US$4.18m falling due after that. Offsetting these obligations, it had cash of US$99.4m as well as receivables valued at US$9.89m due within 12 months. So it actually has US$57.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Neuronetics' balance sheet is almost as strong as Fort Knox. 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 Neuronetics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Neuronetics reported revenue of US$56m, which is a gain of 9.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Neuronetics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Neuronetics 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$27m and booked a US$27m accounting loss. But at least it has US$64.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Neuronetics you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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