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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that Exagen inc. (NASDAQ: XGN) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Exagen’s net debt?
As you can see below, Exagen was in debt of US $ 26.3 million, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, it has US $ 118.1 million in cash offsetting this, which leads to a net cash position of US $ 91.8 million.
A look at Exagen’s responsibilities
We can see from the most recent balance sheet that Exagen had liabilities of US $ 7.88 million maturing within one year and liabilities of US $ 28.2 million maturing beyond that. . In compensation for these obligations, he had cash of US $ 118.1 million as well as receivables valued at US $ 8.22 million at 12 months. It can therefore take advantage of $ 90.2 million in liquid assets more than total Liabilities.
This excess liquidity suggests that Exagen’s balance sheet could take a hit just as Homer Simpson’s head can take a hit. With this in mind, one could postulate that its track record means that the company is able to cope with some adversity. In short, Exagen has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Exagen can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over the past year, Exagen has not been profitable in terms of EBIT, but has managed to increase its revenue by 5.6% to US $ 43 million. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
So how risky is Exagen?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Exagen has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded negative free cash outflows of US $ 16 million and a book loss of US $ 17 million. While this does make the company a bit risky, it’s important to remember that it has a net cash position of $ 91.8 million. This jackpot means the business can continue to spend on growth for at least two years, at current rates. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Exagen (of which 1 is of concern!) that you should know about.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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