Exagen (NASDAQ:XGN) Has Debt But No Earnings; Should You Worry?

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. We note that Exagen Inc. (NASDAQ:XGN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Exagen

What Is Exagen's Debt?

The chart below, which you can click on for greater detail, shows that Exagen had US$27.7m in debt in March 2022; about the same as the year before. But on the other hand it also has US$89.8m in cash, leading to a US$62.1m net cash position.

A Look At Exagen's Liabilities

We can see from the most recent balance sheet that Exagen had liabilities of US$11.9m falling due within a year, and liabilities of US$34.0m due beyond that. Offsetting this, it had US$89.8m in cash and US$10.9m in receivables that were due within 12 months. So it actually has US$54.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Exagen's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 it is future earnings, more than anything, that will determine Exagen's ability to maintain a healthy balance sheet going forward. 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 12%, to US$48m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Exagen?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Exagen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$28m of cash and made a loss of US$31m. While this does make the company a bit risky, it's important to remember it has net cash of US$62.1m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Exagen is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.