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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies ViewRay, Inc. (NASDAQ:VRAY) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 ViewRay's Debt?
As you can see below, ViewRay had US$57.1m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$166.9m in cash to offset that, meaning it has US$109.8m net cash.
How Healthy Is ViewRay's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ViewRay had liabilities of US$53.0m due within 12 months and liabilities of US$81.8m due beyond that. Offsetting this, it had US$166.9m in cash and US$15.4m in receivables that were due within 12 months. So it can boast US$47.5m more liquid assets than total liabilities.
This surplus suggests that ViewRay has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ViewRay boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ViewRay 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, ViewRay made a loss at the EBIT level, and saw its revenue drop to US$59m, which is a fall of 10%. That's not what we would hope to see.
So How Risky Is ViewRay?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that ViewRay had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$64m and booked a US$112m accounting loss. But at least it has US$109.8m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - ViewRay has 2 warning signs we think you should be aware of.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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