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

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 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. 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.

Check out our latest analysis for Sarepta Therapeutics

What Is Sarepta Therapeutics's Debt?

The image below, which you can click on for greater detail, shows that Sarepta Therapeutics had debt of US$1.24b at the end of December 2023, a reduction from US$1.54b over a year. However, it does have US$1.68b in cash offsetting this, leading to net cash of US$438.3m.

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$653.7m due within 12 months and liabilities of US$1.75b due beyond that. Offsetting these obligations, it had cash of US$1.68b as well as receivables valued at US$439.7m due within 12 months. So it has liabilities totalling US$289.3m more than its cash and near-term receivables, combined.

Of course, Sarepta Therapeutics has a titanic market capitalization of US$11.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 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.

In the last year Sarepta Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sarepta Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. 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$486m and booked a US$536m accounting loss. But the saving grace is the US$438.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sarepta Therapeutics that you should be aware of.

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.