Is Nevro (NYSE:NVRO) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Nevro Corp. (NYSE:NVRO) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Nevro

How Much Debt Does Nevro Carry?

The chart below, which you can click on for greater detail, shows that Nevro had US$187.8m in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds US$320.3m in cash, so it actually has US$132.5m net cash.

How Strong Is Nevro's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nevro had liabilities of US$79.7m due within 12 months and liabilities of US$196.2m due beyond that. Offsetting this, it had US$320.3m in cash and US$69.0m in receivables that were due within 12 months. So it actually has US$113.3m more liquid assets than total liabilities.

This surplus suggests that Nevro is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nevro has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nevro'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 Nevro wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to US$423m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Nevro?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nevro lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$72m of cash and made a loss of US$102m. While this does make the company a bit risky, it's important to remember it has net cash of US$132.5m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Nevro is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.