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Health Check: How Prudently Does Exagen (NASDAQ:XGN) Use Debt?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Exagen Inc. (NASDAQ:XGN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Exagen

What Is Exagen's Debt?

As you can see below, Exagen had US$27.3m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$106.8m in cash to offset that, meaning it has US$79.5m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Exagen's Balance Sheet?

According to the last reported balance sheet, Exagen had liabilities of US$8.10m due within 12 months, and liabilities of US$28.9m due beyond 12 months. On the other hand, it had cash of US$106.8m and US$9.21m worth of receivables due within a year. So it can boast US$79.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Exagen's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Exagen has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 22%, to US$48m. With any luck the company will be able to grow its way to profitability.

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 in the last year Exagen had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$19m of cash and made a loss of US$23m. But the saving grace is the US$79.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Exagen 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. For instance, we've identified 3 warning signs for Exagen that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.