Is Vapotherm (NYSE:VAPO) Using Too Much Debt?

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

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Vapotherm

What Is Vapotherm's Debt?

You can click the graphic below for the historical numbers, but it shows that Vapotherm had US$41.4m of debt in September 2021, down from US$46.5m, one year before. But on the other hand it also has US$70.3m in cash, leading to a US$28.9m net cash position.

How Strong Is Vapotherm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vapotherm had liabilities of US$35.2m due within 12 months and liabilities of US$53.4m due beyond that. Offsetting this, it had US$70.3m in cash and US$20.8m in receivables that were due within 12 months. So it can boast US$2.57m more liquid assets than total liabilities.

Having regard to Vapotherm's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$390.8m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Vapotherm has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vapotherm can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Vapotherm reported revenue of US$132m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Vapotherm?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Vapotherm lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$55m and booked a US$58m accounting loss. However, it has net cash of US$28.9m, so it has a bit of time before it will need more capital. Vapotherm's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 2 warning signs for Vapotherm you should be aware of.

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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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.