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.' 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 note that Exagen Inc. (NASDAQ:XGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Exagen
What Is Exagen's Debt?
As you can see below, Exagen had US$27.3m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$106.8m in cash offsetting this, leading to net cash of US$79.5m.
How Strong Is Exagen's Balance Sheet?
The latest balance sheet data shows that Exagen had liabilities of US$8.10m due within a year, and liabilities of US$28.9m falling due after that. Offsetting these obligations, it had cash of US$106.8m as well as receivables valued at US$9.21m due within 12 months. So it can boast US$79.0m more liquid assets than total liabilities.
This luscious liquidity implies that Exagen's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Exagen 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 Exagen 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 Exagen wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$48m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Exagen?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Exagen had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$19m and booked a US$23m accounting loss. But the saving grace is the US$79.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Exagen may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 3 warning signs with Exagen , and understanding them should be part of your investment process.
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.
Valuation is complex, but we're here to simplify it.
Discover if Exagen might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NasdaqGM:XGN
Exagen
Develops and commercializes various testing products under the AVISE brand in the United States.
Undervalued with adequate balance sheet.