DexCom (NASDAQ:DXCM) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that DexCom, Inc. (NASDAQ:DXCM) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for DexCom

What Is DexCom's Debt?

The chart below, which you can click on for greater detail, shows that DexCom had US$1.97b in debt in March 2023; about the same as the year before. But on the other hand it also has US$2.57b in cash, leading to a US$595.3m net cash position.

A Look At DexCom's Liabilities

We can see from the most recent balance sheet that DexCom had liabilities of US$1.87b falling due within a year, and liabilities of US$1.42b due beyond that. Offsetting these obligations, it had cash of US$2.57b as well as receivables valued at US$652.5m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to DexCom's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$47.5b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, DexCom boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DexCom grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DexCom'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While DexCom has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, DexCom produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DexCom has US$595.3m in net cash. And it impressed us with its EBIT growth of 52% over the last year. So we don't think DexCom's use of debt is risky. We'd be very excited to see if DexCom insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.