Is Nevro (NYSE:NVRO) Weighed On By Its Debt Load?

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.' 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 Nevro Corp. (NYSE:NVRO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Nevro

What Is Nevro's Debt?

The image below, which you can click on for greater detail, shows that Nevro had debt of US$186.0m at the end of March 2022, a reduction from US$315.0m over a year. However, it does have US$323.6m in cash offsetting this, leading to net cash of US$137.7m.

A Look At Nevro's Liabilities

According to the last reported balance sheet, Nevro had liabilities of US$70.3m due within 12 months, and liabilities of US$222.2m due beyond 12 months. Offsetting this, it had US$323.6m in cash and US$63.1m in receivables that were due within 12 months. So it can boast US$94.2m more liquid assets than total liabilities.

This surplus suggests that Nevro has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nevro boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nevro 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.

Over 12 months, Nevro reported revenue of US$386m, which is a gain of 6.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Nevro?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$75m of cash and made a loss of US$136m. But the saving grace is the US$137.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. For instance, we've identified 2 warning signs for Nevro that you should be aware of.

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.