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. Importantly, Sarepta Therapeutics, Inc. (NASDAQ:SRPT) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Sarepta Therapeutics's Debt?
As you can see below, Sarepta Therapeutics had US$431.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.12b in cash, so it actually has US$692.0m net cash.
How Healthy Is Sarepta Therapeutics's Balance Sheet?
We can see from the most recent balance sheet that Sarepta Therapeutics had liabilities of US$162.1m falling due within a year, and liabilities of US$486.5m due beyond that. Offsetting this, it had US$1.12b in cash and US$74.5m in receivables that were due within 12 months. So it actually has US$549.0m more liquid assets than total liabilities.
This surplus suggests that Sarepta Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sarepta Therapeutics 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 ultimately the future profitability of the business will decide if Sarepta Therapeutics 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, Sarepta Therapeutics reported revenue of US$345m, which is a gain of 43%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Sarepta Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sarepta Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$537m and booked a US$570m accounting loss. However, it has net cash of US$1.1b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Sarepta Therapeutics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 Sarepta Therapeutics insider transactions.
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.
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