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 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 is this debt a concern to shareholders?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Guardant Health's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Guardant Health had US$806.3m of debt, an increase on none, over one year. But on the other hand it also has US$1.79b in cash, leading to a US$988.6m net cash position.
How Healthy Is Guardant Health's Balance Sheet?
According to the last reported balance sheet, Guardant Health had liabilities of US$66.8m due within 12 months, and liabilities of US$849.4m due beyond 12 months. On the other hand, it had cash of US$1.79b and US$53.3m worth of receivables due within a year. So it can boast US$932.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Guardant Health could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guardant Health has more cash than debt is arguably a good indication that it can manage its debt safely. 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$287m, which is a gain of 34%, 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 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$158m and booked a US$254m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$988.6m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Guardant Health may be on a path to profitability. 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. For instance, we've identified 2 warning signs for Guardant Health that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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