Does Vapotherm (NYSE:VAPO) Have A Healthy Balance Sheet?

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 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. Importantly, Vapotherm, Inc. (NYSE:VAPO) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vapotherm

What Is Vapotherm's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Vapotherm had debt of US$46.5m, up from US$44.6m in one year. But on the other hand it also has US$139.0m in cash, leading to a US$92.5m net cash position.

A Look At Vapotherm's Liabilities

According to the last reported balance sheet, Vapotherm had liabilities of US$30.2m due within 12 months, and liabilities of US$42.9m due beyond 12 months. Offsetting this, it had US$139.0m in cash and US$10.9m in receivables that were due within 12 months. So it actually has US$76.8m more liquid assets than total liabilities.

This surplus suggests that Vapotherm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vapotherm 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 ultimately the future profitability of the business will decide if Vapotherm 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 Vapotherm wasn't profitable at an EBIT level, but managed to grow its revenue by 109%, to US$98m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Vapotherm?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Vapotherm had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$51m of cash and made a loss of US$47m. But at least it has US$92.5m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Vapotherm has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Vapotherm that you should be aware of before investing here.

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. 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.
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