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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Exact Sciences Corporation (NASDAQ:EXAS) makes use of debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Exact Sciences Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Exact Sciences had US$1.56b of debt, an increase on US$806.0m, over one year. However, it also had US$1.22b in cash, and so its net debt is US$336.0m.
How Healthy Is Exact Sciences's Balance Sheet?
According to the last reported balance sheet, Exact Sciences had liabilities of US$222.3m due within 12 months, and liabilities of US$1.73b due beyond 12 months. On the other hand, it had cash of US$1.22b and US$165.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$568.7m.
Since publicly traded Exact Sciences shares are worth a very impressive total of US$11.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Exact Sciences can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Exact Sciences wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to US$1.1b. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Exact Sciences still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$242m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$240m of cash over the last year. So to be blunt we think it is risky. 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 Exact Sciences .
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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