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.' 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. 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.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Exact Sciences

What Is Exact Sciences's Net Debt?

As you can see below, at the end of June 2024, Exact Sciences had US$2.57b of debt, up from US$2.36b a year ago. Click the image for more detail. However, because it has a cash reserve of US$946.8m, its net debt is less, at about US$1.62b.

A Look At Exact Sciences' Liabilities

The latest balance sheet data shows that Exact Sciences had liabilities of US$668.6m due within a year, and liabilities of US$2.81b falling due after that. On the other hand, it had cash of US$946.8m and US$292.2m worth of receivables due within a year. So its liabilities total US$2.24b more than the combination of its cash and short-term receivables.

Since publicly traded Exact Sciences shares are worth a very impressive total of US$12.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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'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 14%, to US$2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Exact Sciences had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$282m at the EBIT level. 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. Another cause for caution is that is bled US$15m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Exact Sciences is showing 1 warning sign in our investment analysis , you should know about...

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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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.