David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies NovoCure Limited (NASDAQ:NVCR) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 NovoCure's Debt?
As you can see below, NovoCure had US$149.3m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$284.6m in cash, leading to a US$135.2m net cash position.
How Strong Is NovoCure's Balance Sheet?
According to the last reported balance sheet, NovoCure had liabilities of US$73.6m due within 12 months, and liabilities of US$173.7m due beyond 12 months. On the other hand, it had cash of US$284.6m and US$57.8m worth of receivables due within a year. So it actually has US$95.1m more liquid assets than total liabilities.
This state of affairs indicates that NovoCure's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$8.82b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that NovoCure 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 NovoCure'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.
Over 12 months, NovoCure reported revenue of US$294m, which is a gain of 35%. With any luck the company will be able to grow its way to profitability.
So How Risky Is NovoCure?
While NovoCure lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$19m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 35% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like NovoCure 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.
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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