These 4 Measures Indicate That DexCom (NASDAQ:DXCM) Is Using Debt Safely

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 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. Importantly, DexCom, Inc. (NASDAQ:DXCM) does carry 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DexCom

How Much Debt Does DexCom Carry?

As you can see below, DexCom had US$2.44b of debt at June 2024, down from US$3.20b a year prior. However, it does have US$3.12b in cash offsetting this, leading to net cash of US$682.9m.

How Healthy Is DexCom's Balance Sheet?

The latest balance sheet data shows that DexCom had liabilities of US$1.72b due within a year, and liabilities of US$2.64b falling due after that. Offsetting these obligations, it had cash of US$3.12b as well as receivables valued at US$998.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$245.5m.

This state of affairs indicates that DexCom's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$27.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, DexCom also has more cash than debt, so we're pretty confident it can manage its debt safely.

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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, DexCom recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about DexCom's liabilities, but we can be reassured by the fact it has has net cash of US$682.9m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$666m. So we don't think DexCom's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for DexCom you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.