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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Nevro Corp. (NYSE:NVRO) makes use of debt. But the more important question is: how much risk is that debt creating?
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 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Nevro Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Nevro had debt of US$310.5m, up from US$160.3m in one year. However, its balance sheet shows it holds US$588.0m in cash, so it actually has US$277.4m net cash.
How Strong Is Nevro's Balance Sheet?
According to the last reported balance sheet, Nevro had liabilities of US$239.2m due within 12 months, and liabilities of US$161.8m due beyond 12 months. Offsetting these obligations, it had cash of US$588.0m as well as receivables valued at US$77.7m due within 12 months. So it actually has US$264.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Nevro could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nevro boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 7.2%, to US$362m. We would much prefer see growth.
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. Indeed, in that time it burnt through US$4.8m of cash and made a loss of US$83m. While this does make the company a bit risky, it's important to remember it has net cash of US$277.4m. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Nevro .
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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