The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Glaukos Corporation (NYSE:GKOS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.

What Is Glaukos’s Net Debt?

As you can see below, at the end of June 2021, Glaukos had US$279.3m of debt, up from US$184.0m a year ago. Click the image for more detail. But on the other hand it also has US$418.6m in cash, leading to a US$139.2m net cash position.

How Strong Is Glaukos’ Balance Sheet?

We can see from the most recent balance sheet that Glaukos had liabilities of US$349.5m falling due within a year, and liabilities of US$109.9m due beyond that. On the other hand, it had cash of US$418.6m and US$37.6m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Glaukos’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$2.28b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Despite its noteworthy liabilities, Glaukos boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Glaukos’s ability to maintain a healthy balance sheet going forward.

In the last year Glaukos wasn’t profitable at an EBIT level, but managed to grow its revenue by 34%, to US$284m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Glaukos?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Glaukos had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$19m and booked a US$60m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$139.2m. That means it could keep spending at its current rate for more than two years. Glaukos’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt.