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 note that Natera, Inc. (NASDAQ:NTRA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Natera's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Natera had US$250.0m of debt, an increase on US$123.7m, over one year. However, its balance sheet shows it holds US$809.6m in cash, so it actually has US$559.5m net cash.
A Look At Natera's Liabilities
Zooming in on the latest balance sheet data, we can see that Natera had liabilities of US$195.9m due within 12 months and liabilities of US$244.8m due beyond that. Offsetting this, it had US$809.6m in cash and US$70.7m in receivables that were due within 12 months. So it actually has US$439.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Natera could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Natera has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Natera 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.
Over 12 months, Natera reported revenue of US$362m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Natera?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Natera had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$139m of cash and made a loss of US$189m. While this does make the company a bit risky, it's important to remember it has net cash of US$559.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Natera's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Natera is showing 4 warning signs 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. 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.
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