Is DexCom (NASDAQ:DXCM) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that DexCom, Inc. (NASDAQ:DXCM) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for DexCom

How Much Debt Does DexCom Carry?

As you can see below, DexCom had US$1.70b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.70b in cash offsetting this, leading to net cash of US$994.4m.

How Healthy Is DexCom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DexCom had liabilities of US$734.9m due within 12 months and liabilities of US$1.90b due beyond that. Offsetting these obligations, it had cash of US$2.70b as well as receivables valued at US$529.1m due within 12 months. So it actually has US$587.2m more liquid assets than total liabilities.

Having regard to DexCom's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$54.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that DexCom has more cash than debt is arguably a good indication that it can manage its debt safely.

Also relevant is that DexCom has grown its EBIT by a very respectable 24% in the last year, thus enhancing its ability to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DexCom can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case DexCom has US$994.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 24% over the last year. So we don't think DexCom's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for DexCom (of which 1 is significant!) you should know about.

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.