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'. 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 Quanterix Corporation (NASDAQ:QTRX) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Quanterix's Net Debt?
The chart below, which you can click on for greater detail, shows that Quanterix had US$7.64m in debt in September 2019; about the same as the year before. However, it does have US$113.3m in cash offsetting this, leading to net cash of US$105.7m.
How Healthy Is Quanterix's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Quanterix had liabilities of US$18.2m due within 12 months and liabilities of US$21.1m due beyond that. Offsetting these obligations, it had cash of US$113.3m as well as receivables valued at US$11.9m due within 12 months. So it actually has US$85.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Quanterix could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Quanterix 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 ultimately the future profitability of the business will decide if Quanterix can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Quanterix reported revenue of US$52m, which is a gain of 55%, 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 Quanterix?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Quanterix had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$40m of cash and made a loss of US$39m. But the saving grace is the US$105.7m 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, Quanterix may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Quanterix .
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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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