Health Check: How Prudently Does Accuray (NASDAQ:ARAY) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Accuray Incorporated (NASDAQ:ARAY) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Accuray

How Much Debt Does Accuray Carry?

The chart below, which you can click on for greater detail, shows that Accuray had US$170.2m in debt in September 2024; about the same as the year before. However, it also had US$59.2m in cash, and so its net debt is US$111.0m.

How Strong Is Accuray's Balance Sheet?

According to the last reported balance sheet, Accuray had liabilities of US$201.8m due within 12 months, and liabilities of US$226.0m due beyond 12 months. On the other hand, it had cash of US$59.2m and US$92.8m worth of receivables due within a year. So its liabilities total US$275.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$192.1m, we think shareholders really should watch Accuray's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Accuray 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, Accuray made a loss at the EBIT level, and saw its revenue drop to US$444m, which is a fall of 2.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Accuray produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$1.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$14m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Accuray you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.