Health Check: How Prudently Does Glaukos (NYSE:GKOS) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Glaukos Corporation (NYSE:GKOS) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Glaukos

How Much Debt Does Glaukos Carry?

As you can see below, Glaukos had US$282.1m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$303.8m in cash, leading to a US$21.7m net cash position.

How Strong Is Glaukos' Balance Sheet?

The latest balance sheet data shows that Glaukos had liabilities of US$63.9m due within a year, and liabilities of US$404.0m falling due after that. On the other hand, it had cash of US$303.8m and US$39.3m worth of receivables due within a year. So it has liabilities totalling US$124.9m more than its cash and near-term receivables, combined.

Of course, Glaukos has a market capitalization of US$3.46b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Glaukos also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Glaukos 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.

In the last year Glaukos wasn't profitable at an EBIT level, but managed to grow its revenue by 2.9%, to US$297m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Glaukos?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Glaukos had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$97m and booked a US$126m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$21.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Glaukos you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.