Would Exact Sciences (NASDAQ:EXAS) Be Better Off With Less 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. We can see that Exact Sciences Corporation (NASDAQ:EXAS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Exact Sciences

How Much Debt Does Exact Sciences Carry?

As you can see below, Exact Sciences had US$2.23b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$728.0m in cash offsetting this, leading to net debt of about US$1.51b.

How Healthy Is Exact Sciences' Balance Sheet?

We can see from the most recent balance sheet that Exact Sciences had liabilities of US$443.3m falling due within a year, and liabilities of US$2.78b due beyond that. Offsetting these obligations, it had cash of US$728.0m as well as receivables valued at US$188.2m due within 12 months. So it has liabilities totalling US$2.31b 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 market capitalization of US$6.12b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Exact Sciences can strengthen its balance sheet over time. 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 Exact Sciences wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$1.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Exact Sciences had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$729m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$437m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Exact Sciences that you should be aware of before investing here.

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.