Shockwave Medical (NASDAQ:SWAV) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Shockwave Medical, Inc. (NASDAQ:SWAV) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shockwave Medical

How Much Debt Does Shockwave Medical Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Shockwave Medical had debt of US$24.3m, up from US$17.4m in one year. However, its balance sheet shows it holds US$258.6m in cash, so it actually has US$234.3m net cash.

How Strong Is Shockwave Medical's Balance Sheet?

We can see from the most recent balance sheet that Shockwave Medical had liabilities of US$80.2m falling due within a year, and liabilities of US$89.5m due beyond that. Offsetting this, it had US$258.6m in cash and US$96.6m in receivables that were due within 12 months. So it actually has US$185.5m 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. Simply put, the fact that Shockwave Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Shockwave Medical grew its EBIT by 145% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 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 positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shockwave Medical has net cash of US$234.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$126m. 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. We've identified 2 warning signs with Shockwave Medical (at least 1 which is significant) , and understanding them should be part of your investment process.

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.