AxoGen (NASDAQ:AXGN) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that AxoGen, Inc. (NASDAQ:AXGN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for AxoGen

What Is AxoGen's Debt?

The chart below, which you can click on for greater detail, shows that AxoGen had US$49.9m in debt in September 2022; about the same as the year before. However, it does have US$53.1m in cash offsetting this, leading to net cash of US$3.22m.

A Look At AxoGen's Liabilities

According to the last reported balance sheet, AxoGen had liabilities of US$23.5m due within 12 months, and liabilities of US$70.5m due beyond 12 months. On the other hand, it had cash of US$53.1m and US$21.4m worth of receivables due within a year. So it has liabilities totalling US$19.6m more than its cash and near-term receivables, combined.

Given AxoGen has a market capitalization of US$401.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, AxoGen also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AxoGen'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.

In the last year AxoGen wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to US$134m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AxoGen?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that AxoGen 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$41m and booked a US$29m accounting loss. But the saving grace is the US$3.22m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like AxoGen I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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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.