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. 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. As with many other companies Invitae Corporation (NYSE:NVTA) makes use of debt. But is this debt a concern to shareholders?
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. 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.
What Is Invitae's Debt?
As you can see below, at the end of September 2019, Invitae had US$265.2m of debt, up from US$62.3m a year ago. Click the image for more detail. However, it does have US$467.3m in cash offsetting this, leading to net cash of US$202.1m.
A Look At Invitae's Liabilities
Zooming in on the latest balance sheet data, we can see that Invitae had liabilities of US$68.9m due within 12 months and liabilities of US$317.6m due beyond that. On the other hand, it had cash of US$467.3m and US$26.7m worth of receivables due within a year. So it can boast US$107.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Invitae could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Invitae 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 ultimately the future profitability of the business will decide if Invitae can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Invitae reported revenue of US$196m, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Invitae?
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 Invitae lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$129m and booked a US$195m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$202.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. Invitae's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Invitae I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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