Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Surmodics, Inc. (NASDAQ:SRDX) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Surmodics Carry?
The image below, which you can click on for greater detail, shows that at June 2022 Surmodics had debt of US$10.0m, up from none in one year. However, its balance sheet shows it holds US$22.1m in cash, so it actually has US$12.1m net cash.
How Strong Is Surmodics' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Surmodics had liabilities of US$29.4m due within 12 months and liabilities of US$21.2m due beyond that. Offsetting these obligations, it had cash of US$22.1m as well as receivables valued at US$23.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.64m.
This state of affairs indicates that Surmodics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$437.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Surmodics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Surmodics 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 Surmodics had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to US$98m. That's not what we would hope to see.
So How Risky Is Surmodics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Surmodics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$19m of cash and made a loss of US$13m. Given it only has net cash of US$12.1m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Surmodics's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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