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 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 ShockWave Medical, Inc. (NASDAQ:SWAV) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ShockWave Medical’s Debt?
The chart below, which you can click on for greater detail, shows that ShockWave Medical had US$17.1m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds US$201.0m in cash, so it actually has US$183.9m net cash.
How Healthy Is ShockWave Medical’s Balance Sheet?
We can see from the most recent balance sheet that ShockWave Medical had liabilities of US$51.6m falling due within a year, and liabilities of US$52.2m due beyond that. Offsetting these obligations, it had cash of US$201.0m as well as receivables valued at US$37.4m due within 12 months. So it actually has US$134.6m more liquid assets than total liabilities.
This short term liquidity is a sign that ShockWave Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ShockWave Medical 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 ultimately the future profitability of the business will decide if ShockWave Medical can strengthen its balance sheet over time.
In the last year ShockWave Medical wasn’t profitable at an EBIT level, but managed to grow its revenue by 250%, to US$237m. That’s virtually the hole-in-one of revenue growth!
So How Risky Is ShockWave Medical?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ShockWave Medical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$29m of cash and made a loss of US$9.1m. However, it has net cash of US$183.9m, so it has a bit of time before it will need more capital. The good news for shareholders is that ShockWave Medical has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start.
