Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies ShockWave Medical, Inc. (NASDAQ:SWAV) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for ShockWave Medical
What is ShockWave Medical’s debt?
The chart below, which you can click on for more details, shows that ShockWave Medical had US$17.1 million in debt as of December 2021; about the same as the previous year. However, his balance sheet shows that he holds $201.0 million in cash, so he actually has $183.9 million in net cash.
How healthy is ShockWave Medical’s balance sheet?
We can see from the most recent balance sheet that ShockWave Medical had liabilities of US$51.6 million due in one year, and liabilities of US$52.2 million due beyond. In compensation for these obligations, it had cash of US$201.0 million as well as receivables valued at US$37.4 million and maturing within 12 months. So he actually has 134.6 million US dollars Continued liquid assets than total liabilities.
This short-term liquidity is a sign that ShockWave Medical could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that ShockWave Medical has more cash than debt is probably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ShockWave Medical can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, ShockWave Medical was not profitable on an EBIT level, but managed to increase its revenue by 250%, to $237 million. That’s practically the hole-in-one of revenue growth!
So how risky is ShockWave Medical?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that ShockWave Medical posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned through $29 million in cash and suffered a loss of $9.1 million. However, he has a net cash position of US$183.9 million, so he still has some time before he needs more capital. The good news for shareholders is that ShockWave Medical has skyrocketing revenue growth, so there’s a very good chance it can grow its free cash flow in the years to come. High-growth, for-profit businesses may well be risky, but they can also offer great rewards. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 3 warning signs we spotted with ShockWave Medical.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.