Is ShockWave Medical (NASDAQ:SWAV) A Risky Investment?

Simply Wall St

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, ShockWave Medical, Inc. (NASDAQ:SWAV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 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

What Is ShockWave Medical's Net Debt?

The chart below, which you can click on for greater detail, shows that ShockWave Medical had US$17.3m in debt in March 2022; about the same as the year before. But on the other hand it also has US$201.1m in cash, leading to a US$183.8m net cash position.

NasdaqGS:SWAV Debt to Equity History August 2nd 2022

How Healthy Is ShockWave Medical's Balance Sheet?

The latest balance sheet data shows that ShockWave Medical had liabilities of US$51.0m due within a year, and liabilities of US$53.7m falling due after that. Offsetting this, it had US$201.1m in cash and US$47.8m in receivables that were due within 12 months. So it actually has US$144.3m more liquid assets than total liabilities.

This state of affairs indicates that ShockWave Medical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$7.62b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ShockWave Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, ShockWave Medical turned things around in the last 12 months, delivering and EBIT of US$32m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ShockWave Medical 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 company can only pay off debt with cold hard cash, not accounting profits. ShockWave Medical 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 most recent year, ShockWave Medical recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case ShockWave Medical has US$183.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in US$23m. So we don't think ShockWave Medical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - ShockWave Medical has 1 warning sign we think you should be aware of.

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.

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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.