Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. 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. We can see that Myriad Genetics, Inc. (NASDAQ:MYGN) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Myriad Genetics’s Debt?
As you can see below, Myriad Genetics had US$225.1m of debt at December 2019, down from US$273.3m a year prior. However, it does have US$141.6m in cash offsetting this, leading to net debt of about US$83.5m.
How Healthy Is Myriad Genetics’s Balance Sheet?
According to the last reported balance sheet, Myriad Genetics had liabilities of US$112.4m due within 12 months, and liabilities of US$388.6m due beyond 12 months. On the other hand, it had cash of US$141.6m and US$121.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$237.6m.
Given Myriad Genetics has a market capitalization of US$1.32b, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Myriad Genetics’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.
In the last year Myriad Genetics wasn’t profitable at an EBIT level, but managed to grow its revenue by 2.2%, to US$813m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Myriad Genetics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year’s loss of US$26m. So to be blunt we do think it is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Be aware that Myriad Genetics is showing 2 warning signs in our investment analysis , you should know about…
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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