Is AxoGen (NASDAQ:AXGN) Using Debt Sensibly?

Simply Wall St
December 15, 2021
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies AxoGen, Inc. (NASDAQ:AXGN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AxoGen

How Much Debt Does AxoGen Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 AxoGen had US$50.1m of debt, an increase on US$34.3m, over one year. However, it does have US$91.7m in cash offsetting this, leading to net cash of US$41.7m.

NasdaqCM:AXGN Debt to Equity History December 15th 2021

A Look At AxoGen's Liabilities

According to the last reported balance sheet, AxoGen had liabilities of US$23.4m due within 12 months, and liabilities of US$71.3m due beyond 12 months. On the other hand, it had cash of US$91.7m and US$18.6m worth of receivables due within a year. So it actually has US$15.7m more liquid assets than total liabilities.

This surplus suggests that AxoGen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AxoGen has more cash than debt is arguably a good indication that 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year AxoGen wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$128m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AxoGen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$34m and booked a US$28m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$41.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for AxoGen that you should be aware of.

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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