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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.’ 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 Xtant Medical Holdings, Inc. (NYSEMKT:XTNT) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Xtant Medical Holdings’s Debt?
You can click the graphic below for the historical numbers, but it shows that Xtant Medical Holdings had US$73.2m of debt in March 2019, down from US$77.6m, one year before On the flip side, it has US$7.10m in cash leading to net debt of about US$66.1m.
How Strong Is Xtant Medical Holdings’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Xtant Medical Holdings had liabilities of US$11.3m due within 12 months and liabilities of US$75.0m due beyond that. Offsetting this, it had US$7.10m in cash and US$9.49m in receivables that were due within 12 months. So its liabilities total US$69.7m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$38.9m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt After all, Xtant Medical Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Because it carries more debt than cash, we think it’s worth watching Xtant Medical Holdings’s balance sheet over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xtant Medical Holdings’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Xtant Medical Holdings actually shrunk its revenue by 9.5%, to US$71m. We would much prefer see growth.
Importantly, Xtant Medical Holdings had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$7.1m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year’s loss of-US$67.6m. And until that time we think this is a risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Xtant Medical Holdings’s profit, revenue, and operating cashflow have changed over the last few years.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.