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. 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. Importantly, Ekso Bionics Holdings, Inc. (NASDAQ:EKSO) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Ekso Bionics Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Ekso Bionics Holdings had US$3.31m of debt in September 2019, down from US$5.59m, one year before. But it also has US$8.06m in cash to offset that, meaning it has US$4.75m net cash.
How Healthy Is Ekso Bionics Holdings's Balance Sheet?
We can see from the most recent balance sheet that Ekso Bionics Holdings had liabilities of US$8.09m falling due within a year, and liabilities of US$5.78m due beyond that. On the other hand, it had cash of US$8.06m and US$5.21m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$607.0k.
This state of affairs indicates that Ekso Bionics Holdings's 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$45.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ekso Bionics Holdings 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 Ekso Bionics Holdings'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 Ekso Bionics Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by29%, to US$13m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Ekso Bionics Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ekso Bionics Holdings had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$20m and booked a US$14m accounting loss. Given it only has net cash of US$4.75m, the company may need to raise more capital if it doesn't reach break-even soon. Ekso Bionics Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Ekso Bionics Holdings insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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