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 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. We note that Neuronetics, Inc. (NASDAQ:STIM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Neuronetics's Net Debt?
The chart below, which you can click on for greater detail, shows that Neuronetics had US$35.6m in debt in June 2022; about the same as the year before. However, it does have US$70.9m in cash offsetting this, leading to net cash of US$35.3m.
How Strong Is Neuronetics' Balance Sheet?
The latest balance sheet data shows that Neuronetics had liabilities of US$18.9m due within a year, and liabilities of US$35.6m falling due after that. Offsetting this, it had US$70.9m in cash and US$13.6m in receivables that were due within 12 months. So it actually has US$30.0m more liquid assets than total liabilities.
This excess liquidity is a great indication that Neuronetics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Neuronetics has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Neuronetics'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.
Over 12 months, Neuronetics reported revenue of US$59m, which is a gain of 8.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Neuronetics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Neuronetics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$37m and booked a US$37m accounting loss. However, it has net cash of US$35.3m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Neuronetics that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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