Is GeneDx Holdings (NASDAQ:WGS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that GeneDx Holdings Corp. (NASDAQ:WGS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GeneDx Holdings

What Is GeneDx Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 GeneDx Holdings had debt of US$52.0m, up from US$6.25m in one year. However, it does have US$116.5m in cash offsetting this, leading to net cash of US$64.4m.

How Strong Is GeneDx Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GeneDx Holdings had liabilities of US$77.3m due within 12 months and liabilities of US$127.0m due beyond that. Offsetting these obligations, it had cash of US$116.5m as well as receivables valued at US$38.5m due within 12 months. So it has liabilities totalling US$49.4m more than its cash and near-term receivables, combined.

Given GeneDx Holdings has a market capitalization of US$2.07b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, GeneDx Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if GeneDx Holdings 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, GeneDx Holdings reported revenue of US$267m, which is a gain of 29%, 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 GeneDx Holdings?

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 GeneDx Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$60m of cash and made a loss of US$83m. However, it has net cash of US$64.4m, so it has a bit of time before it will need more capital. GeneDx Holdings'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. To that end, you should be aware of the 3 warning signs we've spotted with GeneDx Holdings .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.