Is Sarepta Therapeutics (NASDAQ:SRPT) Using Too Much Debt?

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. As with many other companies Sarepta Therapeutics, Inc. (NASDAQ:SRPT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sarepta Therapeutics

How Much Debt Does Sarepta Therapeutics Carry?

As you can see below, at the end of December 2022, Sarepta Therapeutics had US$1.54b of debt, up from US$1.10b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.99b in cash, so it actually has US$445.1m net cash.

How Strong Is Sarepta Therapeutics' Balance Sheet?

The latest balance sheet data shows that Sarepta Therapeutics had liabilities of US$619.6m due within a year, and liabilities of US$2.12b falling due after that. Offsetting this, it had US$1.99b in cash and US$259.7m in receivables that were due within 12 months. So it has liabilities totalling US$494.3m more than its cash and near-term receivables, combined.

Given Sarepta Therapeutics has a humongous market capitalization of US$11.4b, it's hard to believe these liabilities pose much threat. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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$933m, which is a gain of 33%, 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?

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. And over the same period it saw negative free cash outflow of US$356m and booked a US$703m accounting loss. Given it only has net cash of US$445.1m, the company may need to raise more capital if it doesn't reach break-even 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sarepta Therapeutics you should know about.

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.