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 LeMaitre Vascular, Inc. (NASDAQ:LMAT) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is LeMaitre Vascular's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 LeMaitre Vascular had US$167.8m of debt, an increase on none, over one year. But on the other hand it also has US$299.7m in cash, leading to a US$132.0m net cash position.

How Healthy Is LeMaitre Vascular's Balance Sheet?

We can see from the most recent balance sheet that LeMaitre Vascular had liabilities of US$30.6m falling due within a year, and liabilities of US$183.9m due beyond that. Offsetting this, it had US$299.7m in cash and US$30.1m in receivables that were due within 12 months. So it can boast US$115.3m more liquid assets than total liabilities.

This surplus suggests that LeMaitre Vascular has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that LeMaitre Vascular has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for LeMaitre Vascular

In addition to that, we're happy to report that LeMaitre Vascular has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LeMaitre Vascular'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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. LeMaitre Vascular may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, LeMaitre Vascular produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LeMaitre Vascular has net cash of US$132.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 40% over the last year. So we don't think LeMaitre Vascular's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for LeMaitre Vascular you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.