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. Importantly, Endologix, Inc. (NASDAQ:ELGX) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Endologix's Debt?
The image below, which you can click on for greater detail, shows that Endologix had debt of US$163.3m at the end of June 2019, a reduction from US$230.7m over a year. However, it also had US$50.9m in cash, and so its net debt is US$112.4m.
How Strong Is Endologix's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Endologix had liabilities of US$42.5m due within 12 months and liabilities of US$209.7m due beyond that. On the other hand, it had cash of US$50.9m and US$22.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$179.0m.
This deficit casts a shadow over the US$111.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Endologix would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Endologix'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.
Over 12 months, Endologix saw its revenue drop to US$141m, which is a fall of 20%. To be frank that doesn't bode well.
While Endologix's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$56m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$43m over the last twelve months. That means it's on the risky side of things. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Endologix insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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