Nasdaq-Listed Companies

Is Silk Road Medical (NASDAQ:SILK) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Silk Road Medical, Inc (NASDAQ:SILK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Silk Road Medical's Debt?

As you can see below, at the end of June 2021, Silk Road Medical had US$48.6m of debt, up from US$45.1m a year ago. Click the image for more detail. However, it does have US$128.1m in cash offsetting this, leading to net cash of US$79.5m.

debt-equity-history-analysisNasdaqGS:SILK Debt to Equity History October 18th 2021

How Healthy Is Silk Road Medical's Balance Sheet?

The latest balance sheet data shows that Silk Road Medical had liabilities of US$16.7m due within a year, and liabilities of US$55.4m falling due after that. On the other hand, it had cash of US$128.1m and US$11.7m worth of receivables due within a year. So it can boast US$67.8m more liquid assets than total liabilities.

This surplus suggests that Silk Road Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Silk Road Medical 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 it is future earnings, more than anything, that will determine Silk Road Medical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Silk Road Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$90m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Silk Road Medical?

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 Silk Road Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$41m of cash and made a loss of US$48m. But the saving grace is the US$79.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Silk Road Medical may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Silk Road Medical that you should be aware of before investing here.

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.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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