Is Sarepta Therapeutics (NASDAQ:SRPT) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Sarepta Therapeutics, Inc. (NASDAQ:SRPT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sarepta Therapeutics

What Is Sarepta Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Sarepta Therapeutics had US$1.09b of debt, an increase on US$700.5m, over one year. But it also has US$1.60b in cash to offset that, meaning it has US$504.2m net cash.

How Healthy Is Sarepta Therapeutics' Balance Sheet?

The latest balance sheet data shows that Sarepta Therapeutics had liabilities of US$373.4m due within a year, and liabilities of US$1.82b falling due after that. On the other hand, it had cash of US$1.60b and US$181.6m worth of receivables due within a year. So its liabilities total US$412.0m more than the combination of its cash and short-term receivables.

Since publicly traded Sarepta Therapeutics shares are worth a total of US$6.37b, 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. While it does have liabilities worth noting, Sarepta Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sarepta Therapeutics 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, Sarepta Therapeutics reported revenue of US$646m, which is a gain of 30%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sarepta Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sarepta Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$551m and booked a US$486m accounting loss. With only US$504.2m 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. 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. Case in point: We've spotted 2 warning signs for Sarepta Therapeutics you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.