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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, GenMark Diagnostics, Inc. (NASDAQ:GNMK) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is GenMark Diagnostics's Debt?
As you can see below, at the end of September 2020, GenMark Diagnostics had US$70.7m of debt, up from US$48.7m a year ago. Click the image for more detail. But on the other hand it also has US$137.3m in cash, leading to a US$66.5m net cash position.
A Look At GenMark Diagnostics's Liabilities
The latest balance sheet data shows that GenMark Diagnostics had liabilities of US$40.7m due within a year, and liabilities of US$80.0m falling due after that. On the other hand, it had cash of US$137.3m and US$16.2m worth of receivables due within a year. So it actually has US$32.9m more liquid assets than total liabilities.
This surplus suggests that GenMark Diagnostics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GenMark Diagnostics 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 GenMark Diagnostics'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 GenMark Diagnostics wasn't profitable at an EBIT level, but managed to grow its revenue by 85%, to US$149m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is GenMark Diagnostics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year GenMark Diagnostics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$25m accounting loss. However, it has net cash of US$66.5m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, GenMark Diagnostics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Take risks, for example - GenMark Diagnostics has 3 warning signs we think you should be aware of.
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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