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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Nevro Corp. (NYSE:NVRO) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nevro

What Is Nevro's Net Debt?

As you can see below, at the end of June 2022, Nevro had US$186.3m of debt, up from US$146.4m a year ago. Click the image for more detail. But it also has US$310.8m in cash to offset that, meaning it has US$124.6m net cash.

How Healthy Is Nevro's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nevro had liabilities of US$72.7m due within 12 months and liabilities of US$221.3m due beyond that. On the other hand, it had cash of US$310.8m and US$66.9m worth of receivables due within a year. So it can boast US$83.8m 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! 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 Nevro's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nevro had a loss before interest and tax, and actually shrunk its revenue by 5.2%, to US$388m. That's not what we would hope to see.

So How Risky Is Nevro?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nevro 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$80m and booked a US$140m accounting loss. But the saving grace is the US$124.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Nevro you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.