Is Codexis (NASDAQ:CDXS) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Codexis, Inc. (NASDAQ:CDXS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Codexis

What Is Codexis's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Codexis had US$28.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$90.3m in cash, so it actually has US$61.6m net cash.

How Strong Is Codexis' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Codexis had liabilities of US$35.1m due within 12 months and liabilities of US$39.7m due beyond that. Offsetting these obligations, it had cash of US$90.3m as well as receivables valued at US$16.5m due within 12 months. So it can boast US$32.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Codexis could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Codexis has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Codexis'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, Codexis made a loss at the EBIT level, and saw its revenue drop to US$64m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Codexis?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Codexis had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$46m of cash and made a loss of US$62m. But at least it has US$61.6m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Codexis that you should be aware of before investing here.

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.