Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, NeuroPace, Inc. (NASDAQ:NPCE) does carry debt. But the real question is whether this debt is making the company risky.
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. 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 NeuroPace's Debt?
As you can see below, at the end of December 2023, NeuroPace had US$57.0m of debt, up from US$52.9m a year ago. Click the image for more detail. But it also has US$66.5m in cash to offset that, meaning it has US$9.50m net cash.
How Strong Is NeuroPace's Balance Sheet?
The latest balance sheet data shows that NeuroPace had liabilities of US$16.2m due within a year, and liabilities of US$70.8m falling due after that. Offsetting these obligations, it had cash of US$66.5m as well as receivables valued at US$12.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.23m.
This state of affairs indicates that NeuroPace's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$411.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, NeuroPace also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 NeuroPace'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 NeuroPace wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to US$65m. With any luck the company will be able to grow its way to profitability.
So How Risky Is NeuroPace?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NeuroPace 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$20m and booked a US$33m accounting loss. But the saving grace is the US$9.50m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. NeuroPace'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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for NeuroPace that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.