Is NeoGenomics (NASDAQ:NEO) Using Too Much Debt?

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 NeoGenomics, Inc. (NASDAQ:NEO) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NeoGenomics

What Is NeoGenomics's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 NeoGenomics had debt of US$533.7m, up from US$171.9m in one year. On the flip side, it has US$515.4m in cash leading to net debt of about US$18.3m.

How Healthy Is NeoGenomics' Balance Sheet?

The latest balance sheet data shows that NeoGenomics had liabilities of US$87.2m due within a year, and liabilities of US$674.3m falling due after that. Offsetting these obligations, it had cash of US$515.4m as well as receivables valued at US$113.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$132.2m.

Since publicly traded NeoGenomics shares are worth a total of US$1.41b, 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. But either way, NeoGenomics has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NeoGenomics'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 NeoGenomics wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to US$484m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, NeoGenomics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$97m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$91m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with NeoGenomics (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.