We Think Shockwave Medical (NASDAQ:SWAV) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shockwave Medical, Inc. (NASDAQ:SWAV) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shockwave Medical

What Is Shockwave Medical's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Shockwave Medical had debt of US$104.2m, up from US$17.3m in one year. But it also has US$416.9m in cash to offset that, meaning it has US$312.6m net cash.

A Look At Shockwave Medical's Liabilities

According to the last reported balance sheet, Shockwave Medical had liabilities of US$142.0m due within 12 months, and liabilities of US$70.6m due beyond 12 months. Offsetting this, it had US$416.9m in cash and US$84.3m in receivables that were due within 12 months. So it actually has US$288.6m 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!

Even more impressive was the fact that Shockwave Medical grew its EBIT by 364% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 most recent two years, Shockwave Medical recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shockwave Medical has net cash of US$312.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 364% year-on-year EBIT growth. So we don't think Shockwave Medical's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shockwave Medical (of which 1 is potentially serious!) you should know about.

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.