Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 ClearPoint Neuro, Inc. (NASDAQ:CLPT) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is ClearPoint Neuro's Debt?
The chart below, which you can click on for greater detail, shows that ClearPoint Neuro had US$17.5m in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds US$61.5m in cash, so it actually has US$44.0m net cash.
How Healthy Is ClearPoint Neuro's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ClearPoint Neuro had liabilities of US$4.39m due within 12 months and liabilities of US$20.0m due beyond that. Offsetting this, it had US$61.5m in cash and US$2.41m in receivables that were due within 12 months. So it actually has US$39.6m more liquid assets than total liabilities.
This short term liquidity is a sign that ClearPoint Neuro could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ClearPoint Neuro has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ClearPoint Neuro can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, ClearPoint Neuro reported revenue of US$15m, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is ClearPoint Neuro?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year ClearPoint Neuro had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$9.7m of cash and made a loss of US$9.3m. But the saving grace is the US$44.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. ClearPoint Neuro'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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with ClearPoint Neuro (including 1 which can't be ignored) .
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. 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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