David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, OrthoPediatrics Corp. (NASDAQ:KIDS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is OrthoPediatrics's Net Debt?

As you can see below, at the end of September 2024, OrthoPediatrics had US$72.7m of debt, up from US$800.0k a year ago. Click the image for more detail. But it also has US$76.1m in cash to offset that, meaning it has US$3.39m net cash.

A Look At OrthoPediatrics' Liabilities

According to the last reported balance sheet, OrthoPediatrics had liabilities of US$34.6m due within 12 months, and liabilities of US$83.8m due beyond 12 months. Offsetting this, it had US$76.1m in cash and US$42.8m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that OrthoPediatrics' 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$590.6m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that OrthoPediatrics 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 it is future earnings, more than anything, that will determine OrthoPediatrics'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 OrthoPediatrics wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$190m. With any luck the company will be able to grow its way to profitability.

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$51m and booked a US$28m accounting loss. But at least it has US$3.39m on the balance sheet to spend on growth, near-term. OrthoPediatrics'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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for OrthoPediatrics that you should be aware of.

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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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.