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.’ 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 can see that Exagen Inc. (NASDAQ:XGN) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Exagen’s Debt?
The chart below, which you can click on for greater detail, shows that Exagen had US$26.3m in debt in March 2021; about the same as the year before. But it also has US$118.1m in cash to offset that, meaning it has US$91.8m net cash.
How Healthy Is Exagen’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Exagen had liabilities of US$7.88m due within 12 months and liabilities of US$28.2m due beyond that. Offsetting this, it had US$118.1m in cash and US$8.22m in receivables that were due within 12 months. So it actually has US$90.2m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. 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.
In the last year Exagen wasn’t profitable at an EBIT level, but managed to grow its revenue by 5.6%, to US$43m. 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?
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. Indeed, in that time it burnt through US$16m of cash and made a loss of US$17m. But the saving grace is the US$91.8m on the balance sheet. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet.