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.' 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. We can see that OrthoPediatrics Corp. (NASDAQ:KIDS) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does OrthoPediatrics Carry?
The image below, which you can click on for greater detail, shows that at June 2022 OrthoPediatrics had debt of US$32.0m, up from US$1.11m in one year. But it also has US$51.2m in cash to offset that, meaning it has US$19.2m net cash.
A Look At OrthoPediatrics' Liabilities
According to the last reported balance sheet, OrthoPediatrics had liabilities of US$31.2m due within 12 months, and liabilities of US$72.5m due beyond 12 months. On the other hand, it had cash of US$51.2m and US$25.4m worth of receivables due within a year. So its liabilities total US$27.1m more than the combination of its cash and short-term receivables.
Since publicly traded OrthoPediatrics shares are worth a total of US$1.16b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, OrthoPediatrics also has more cash than debt, so we're pretty confident 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 OrthoPediatrics 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.
In the last year OrthoPediatrics wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$106m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is OrthoPediatrics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year OrthoPediatrics 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$33m and booked a US$12m accounting loss. However, it has net cash of US$19.2m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example - OrthoPediatrics has 2 warning signs we think you should be aware of.
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.
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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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