We Think Exact Sciences (NASDAQ:EXAS) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Exact Sciences Corporation (NASDAQ:EXAS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Exact Sciences

What Is Exact Sciences's Net Debt?

The chart below, which you can click on for greater detail, shows that Exact Sciences had US$2.24b in debt in December 2022; about the same as the year before. However, it does have US$632.1m in cash offsetting this, leading to net debt of about US$1.60b.

A Look At Exact Sciences' Liabilities

Zooming in on the latest balance sheet data, we can see that Exact Sciences had liabilities of US$412.7m due within 12 months and liabilities of US$2.77b due beyond that. Offsetting this, it had US$632.1m in cash and US$163.5m in receivables that were due within 12 months. So it has liabilities totalling US$2.39b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Exact Sciences has a huge market capitalization of US$11.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Exact Sciences'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.

Over 12 months, Exact Sciences reported revenue of US$2.1b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Exact Sciences produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$621m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$438m 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Exact Sciences that you should be aware of.

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.