Is Sarepta Therapeutics (NASDAQ:SRPT) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sarepta Therapeutics, Inc. (NASDAQ:SRPT) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sarepta Therapeutics

How Much Debt Does Sarepta Therapeutics Carry?

As you can see below, Sarepta Therapeutics had US$1.23b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.46b in cash to offset that, meaning it has US$234.2m net cash.

How Healthy Is Sarepta Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sarepta Therapeutics had liabilities of US$688.5m due within 12 months and liabilities of US$1.66b due beyond that. Offsetting this, it had US$1.46b in cash and US$392.3m in receivables that were due within 12 months. So it has liabilities totalling US$494.5m more than its cash and near-term receivables, combined.

Given Sarepta Therapeutics has a humongous market capitalization of US$12.1b, it's hard to believe these liabilities pose much 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!

It was also good to see that despite losing money on the EBIT line last year, Sarepta Therapeutics turned things around in the last 12 months, delivering and EBIT of US$38m. 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 Sarepta Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sarepta Therapeutics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Sarepta Therapeutics saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Sarepta Therapeutics's liabilities, but we can be reassured by the fact it has has net cash of US$234.2m. So we don't have any problem with Sarepta Therapeutics's use of debt. 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 Sarepta Therapeutics is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.