Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, PAVmed Inc. (NASDAQ:PAVM) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does PAVmed Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 PAVmed had US$29.5m of debt, an increase on none, over one year. But on the other hand it also has US$68.5m in cash, leading to a US$39.0m net cash position.
A Look At PAVmed's Liabilities
According to the last reported balance sheet, PAVmed had liabilities of US$38.9m due within 12 months, and liabilities of US$2.18m due beyond 12 months. On the other hand, it had cash of US$68.5m and US$89.0k worth of receivables due within a year. So it actually has US$27.5m more liquid assets than total liabilities.
This surplus suggests that PAVmed is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, PAVmed boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PAVmed 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.
In the last year PAVmed managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is PAVmed?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months PAVmed lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$62m and booked a US$72m accounting loss. With only US$39.0m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. To that end, you should learn about the 5 warning signs we've spotted with PAVmed (including 2 which don't sit too well with us) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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