Health Check: How Prudently Does Sarepta Therapeutics (NASDAQ:SRPT) Use Debt?

Simply Wall St
October 31, 2021
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Sarepta Therapeutics, Inc. (NASDAQ:SRPT) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Sarepta Therapeutics

How Much Debt Does Sarepta Therapeutics Carry?

As you can see below, at the end of June 2021, Sarepta Therapeutics had US$1.09b of debt, up from US$694.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.73b in cash, so it actually has US$634.3m net cash.

NasdaqGS:SRPT Debt to Equity History November 1st 2021

How Healthy Is Sarepta Therapeutics' Balance Sheet?

The latest balance sheet data shows that Sarepta Therapeutics had liabilities of US$425.0m due within a year, and liabilities of US$1.85b falling due after that. On the other hand, it had cash of US$1.73b and US$148.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$398.4m.

Since publicly traded Sarepta Therapeutics shares are worth a total of US$6.88b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sarepta Therapeutics boasts net cash, 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 Sarepta Therapeutics'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 Sarepta Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$600m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sarepta Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sarepta Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$681m of cash and made a loss of US$634m. With only US$634.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Sarepta Therapeutics'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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sarepta Therapeutics 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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