Is Shockwave Medical (NASDAQ:SWAV) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shockwave Medical, Inc. (NASDAQ:SWAV) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Shockwave Medical

How Much Debt Does Shockwave Medical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shockwave Medical had US$730.9m of debt, an increase on US$14.9m, over one year. But on the other hand it also has US$917.3m in cash, leading to a US$186.4m net cash position.

How Strong Is Shockwave Medical's Balance Sheet?

The latest balance sheet data shows that Shockwave Medical had liabilities of US$78.2m due within a year, and liabilities of US$794.5m falling due after that. Offsetting these obligations, it had cash of US$917.3m as well as receivables valued at US$98.8m due within 12 months. So it can boast US$143.4m more liquid assets than total liabilities.

This surplus suggests that Shockwave Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shockwave Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shockwave Medical has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. 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 Shockwave 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shockwave Medical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Shockwave Medical recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shockwave Medical has US$186.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$143m. So we don't think Shockwave Medical's use of debt is risky. 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. Be aware that Shockwave Medical is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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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.