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.' 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. We note that Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Axonics Modulation Technologies's Debt?
As you can see below, at the end of June 2020, Axonics Modulation Technologies had US$20.8m of debt, up from US$19.9m a year ago. Click the image for more detail. But it also has US$287.7m in cash to offset that, meaning it has US$266.9m net cash.
A Look At Axonics Modulation Technologies's Liabilities
The latest balance sheet data shows that Axonics Modulation Technologies had liabilities of US$30.8m due within a year, and liabilities of US$20.0m falling due after that. Offsetting these obligations, it had cash of US$287.7m as well as receivables valued at US$15.0m due within 12 months. So it actually has US$251.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Axonics Modulation Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Axonics Modulation Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Axonics Modulation Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Axonics Modulation Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 1,513%, to US$53m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Axonics Modulation Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Axonics Modulation Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$90.2m and booked a US$82.2m accounting loss. However, it has net cash of US$266.9m, so it has a bit of time before it will need more capital. The good news for shareholders is that Axonics Modulation Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be 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 example, we've discovered 3 warning signs for Axonics Modulation Technologies that you should be aware of before investing here.
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.
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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