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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.' 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 can see that Guardant Health, Inc. (NASDAQ:GH) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Guardant Health's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Guardant Health had US$806.3m of debt, an increase on none, over one year. But on the other hand it also has US$1.79b in cash, leading to a US$988.6m net cash position.
How Healthy Is Guardant Health's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guardant Health had liabilities of US$66.8m due within 12 months and liabilities of US$849.4m due beyond that. Offsetting this, it had US$1.79b in cash and US$53.3m in receivables that were due within 12 months. So it actually has US$932.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Guardant Health could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guardant Health 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 Guardant Health'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 Guardant Health wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$287m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Guardant Health?
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 Guardant Health lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$158m of cash and made a loss of US$254m. While this does make the company a bit risky, it's important to remember it has net cash of US$988.6m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Guardant Health may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Guardant Health 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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