Is Guardant Health (NASDAQ:GH) A Risky Investment?

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.' 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 Guardant Health, Inc. (NASDAQ:GH) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Guardant Health

What Is Guardant Health's Net Debt?

The chart below, which you can click on for greater detail, shows that Guardant Health had US$1.14b in debt in June 2023; about the same as the year before. However, it does have US$1.22b in cash offsetting this, leading to net cash of US$86.2m.

A Look At Guardant Health's Liabilities

The latest balance sheet data shows that Guardant Health had liabilities of US$200.9m due within a year, and liabilities of US$1.35b falling due after that. Offsetting these obligations, it had cash of US$1.22b as well as receivables valued at US$86.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$236.0m.

Given Guardant Health has a market capitalization of US$4.21b, 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. Despite its noteworthy liabilities, Guardant Health boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guardant Health'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.

Over 12 months, Guardant Health reported revenue of US$510m, 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Guardant Health lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$383m and booked a US$508m accounting loss. But the saving grace is the US$86.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. For example - Guardant Health has 2 warning signs we think 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.