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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Conformis, Inc. (NASDAQ:CFMS) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Conformis's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Conformis had debt of US$25.2m, up from US$19.8m in one year. But on the other hand it also has US$104.6m in cash, leading to a US$79.4m net cash position.
A Look At Conformis' Liabilities
We can see from the most recent balance sheet that Conformis had liabilities of US$29.7m falling due within a year, and liabilities of US$29.0m due beyond that. Offsetting this, it had US$104.6m in cash and US$8.35m in receivables that were due within 12 months. So it can boast US$54.3m more liquid assets than total liabilities.
This surplus liquidity suggests that Conformis' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Conformis 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 it is future earnings, more than anything, that will determine Conformis'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 Conformis had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to US$66m. We would much prefer see growth.
So How Risky Is Conformis?
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 Conformis lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$24m of cash and made a loss of US$26m. While this does make the company a bit risky, it's important to remember it has net cash of US$79.4m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Conformis (of which 2 are a bit unpleasant!) you should know about.
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. 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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