Is Exagen (NASDAQ:XGN) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Exagen

How Much Debt Does Exagen Carry?

As you can see below, Exagen had US$27.5m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$99.4m in cash, leading to a US$72.0m net cash position.

How Strong Is Exagen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Exagen had liabilities of US$9.32m due within 12 months and liabilities of US$29.2m due beyond that. Offsetting these obligations, it had cash of US$99.4m as well as receivables valued at US$9.65m due within 12 months. So it actually has US$70.6m more liquid assets than total liabilities.

This surplus strongly suggests that Exagen has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Exagen has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 15%, to US$48m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$23m and booked a US$27m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$72.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Exagen you should be aware of.

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.