Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, NeoGenomics, Inc. (NASDAQ:NEO) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is NeoGenomics's Net Debt?
As you can see below, NeoGenomics had US$101.4m of debt at June 2019, down from US$138.5m a year prior. But it also has US$167.4m in cash to offset that, meaning it has US$66.1m net cash.
A Look At NeoGenomics's Liabilities
According to the last reported balance sheet, NeoGenomics had liabilities of US$59.2m due within 12 months, and liabilities of US$147.8m due beyond 12 months. On the other hand, it had cash of US$167.4m and US$90.1m worth of receivables due within a year. So it can boast US$50.6m more liquid assets than total liabilities.
This state of affairs indicates that NeoGenomics'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$2.68b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, NeoGenomics boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, NeoGenomics is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 239% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NeoGenomics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NeoGenomics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, NeoGenomics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case NeoGenomics has US$66m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in US$13m. So is NeoGenomics's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in NeoGenomics would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
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