Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Exagen Inc. (NASDAQ:XGN) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Exagen Carry?
The chart below, which you can click on for greater detail, shows that Exagen had US$26.2m in debt in June 2020; about the same as the year before. But on the other hand it also has US$63.7m in cash, leading to a US$37.5m net cash position.
A Look At Exagen's Liabilities
According to the last reported balance sheet, Exagen had liabilities of US$5.76m due within 12 months, and liabilities of US$26.9m due beyond 12 months. On the other hand, it had cash of US$63.7m and US$7.26m worth of receivables due within a year. So it actually has US$38.3m more liquid assets than total liabilities.
It's good to see that Exagen has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Exagen 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 Exagen's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Exagen wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to US$39m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Exagen?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Exagen lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$14m and booked a US$29m accounting loss. But the saving grace is the US$37.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Exagen that you should be aware of.
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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