Is Paragon 28 (NYSE:FNA) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Paragon 28, Inc. (NYSE:FNA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Paragon 28

What Is Paragon 28's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Paragon 28 had debt of US$110.5m, up from US$42.9m in one year. However, it also had US$58.2m in cash, and so its net debt is US$52.3m.

A Look At Paragon 28's Liabilities

We can see from the most recent balance sheet that Paragon 28 had liabilities of US$58.0m falling due within a year, and liabilities of US$112.1m due beyond that. On the other hand, it had cash of US$58.2m and US$40.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$71.0m.

Given Paragon 28 has a market capitalization of US$623.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Paragon 28'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.

In the last year Paragon 28 wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$225m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Paragon 28 produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$42m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$87m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Paragon 28 (1 is potentially serious!) that you should be aware of before investing here.

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.