Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Exact Sciences Corporation (NASDAQ:EXAS) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Exact Sciences's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Exact Sciences had debt of US$806.0m, up from US$654.6m in one year. However, its balance sheet shows it holds US$1.24b in cash, so it actually has US$433.4m net cash.
How Healthy Is Exact Sciences's Balance Sheet?
We can see from the most recent balance sheet that Exact Sciences had liabilities of US$492.5m falling due within a year, and liabilities of US$523.9m due beyond that. Offsetting these obligations, it had cash of US$1.24b as well as receivables valued at US$65.5m due within 12 months. So it can boast US$288.5m more liquid assets than total liabilities.
This state of affairs indicates that Exact Sciences's 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$15.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Exact Sciences 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 it is future earnings, more than anything, that will determine Exact Sciences'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 Exact Sciences managed to grow its revenue by 76%, to US$623m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Exact Sciences?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Exact Sciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$249m of cash and made a loss of US$221m. But the saving grace is the US$1.2b on the balance sheet. That means it could keep spending at its current rate for more than four years. With very solid revenue growth in the last year, Exact Sciences may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Exact Sciences I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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