Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies SeaSpine Holdings Corporation (NASDAQ:SPNE) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
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How much debt does SeaSpine Holdings have?
As you can see below, at the end of June 2022, SeaSpine Holdings had $25.0 million in debt, up from none a year ago. Click on the image for more details. However, he has $66.1 million in cash to offset that, which translates to net cash of $41.1 million.
How healthy is SeaSpine Holdings’ balance sheet?
The latest balance sheet data shows that SeaSpine Holdings had liabilities of $54.4 million due within the year, and liabilities of $44.3 million due thereafter. In return, he had $66.1 million in cash and $34.4 million in receivables due within 12 months. Thus, its total liabilities match its short-term liquid assets almost perfectly.
This situation indicates that SeaSpine Holdings’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So it’s highly unlikely that the $215.7 million company will run out of cash, but it’s still worth keeping an eye on the balance sheet. Simply put, the fact that SeaSpine Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether SeaSpine Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year-over-year, SeaSpine Holdings reported revenue of $209 million, a 17% gain, although it reported no earnings before interest and taxes. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
So how risky is SeaSpine Holdings?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And the fact is that over the last twelve months, SeaSpine Holdings has been losing money in earnings before interest and taxes (EBIT). And during the same period, it recorded a negative free cash outflow of US$80 million and recorded a book loss of US$67 million. While this makes the business a bit risky, it’s important to remember that it has a net cash position of US$41.1 million. That means it could continue spending at its current rate for more than two years. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for SeaSpine Holdings (1 doesn’t sit too well with us) you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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