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 AxoGen, Inc. (NASDAQ:AXGN) 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does AxoGen Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 AxoGen had US$34.3m of debt, an increase on none, over one year. But on the other hand it also has US$99.1m in cash, leading to a US$64.9m net cash position.
A Look At AxoGen's Liabilities
The latest balance sheet data shows that AxoGen had liabilities of US$18.8m due within a year, and liabilities of US$53.4m falling due after that. Offsetting this, it had US$99.1m in cash and US$18.8m in receivables that were due within 12 months. So it can boast US$45.7m more liquid assets than total liabilities.
This short term liquidity is a sign that AxoGen could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AxoGen has more cash than debt is arguably a good indication that 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 AxoGen'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.
Over 12 months, AxoGen reported revenue of US$108m, which is a gain of 5.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is AxoGen?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AxoGen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$36m of cash and made a loss of US$25m. While this does make the company a bit risky, it's important to remember it has net cash of US$64.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for AxoGen you should know about.
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.
This article by Simply Wall St is general in nature. 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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