Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Sarepta Therapeutics, Inc. (NASDAQ:SRPT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Sarepta Therapeutics Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Sarepta Therapeutics had debt of US$694.2m, up from US$431.0m in one year. However, its balance sheet shows it holds US$2.06b in cash, so it actually has US$1.37b net cash.
How Healthy Is Sarepta Therapeutics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sarepta Therapeutics had liabilities of US$354.9m due within 12 months and liabilities of US$1.49b due beyond that. Offsetting this, it had US$2.06b in cash and US$107.1m in receivables that were due within 12 months. So it can boast US$328.2m more liquid assets than total liabilities.
This surplus suggests that Sarepta Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sarepta Therapeutics 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 Sarepta Therapeutics 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 Sarepta Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$450m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Sarepta Therapeutics?
Although Sarepta Therapeutics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$339m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 31% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Sarepta Therapeutics 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.
This article by Simply Wall St is general in nature. 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.
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