Does Guardant Health (NASDAQ:GH) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Guardant Health, Inc. (NASDAQ:GH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

View our latest analysis for Guardant Health

How Much Debt Does Guardant Health Carry?

As you can see below, Guardant Health had US$1.14b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.17b in cash to offset that, meaning it has US$28.7m net cash.

How Healthy Is Guardant Health's Balance Sheet?

We can see from the most recent balance sheet that Guardant Health had liabilities of US$205.9m falling due within a year, and liabilities of US$1.42b due beyond that. Offsetting these obligations, it had cash of US$1.17b as well as receivables valued at US$88.8m due within 12 months. So it has liabilities totalling US$370.3m more than its cash and near-term receivables, combined.

Given Guardant Health has a market capitalization of US$2.19b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Guardant Health 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 ultimately the future profitability of the business will decide if Guardant Health can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Guardant Health reported revenue of US$564m, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Guardant Health?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Guardant Health 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$345m and booked a US$479m accounting loss. But the saving grace is the US$28.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Guardant Health's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Guardant Health is showing 2 warning signs in our investment analysis , 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.