Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Sarepta Therapeutics, Inc. (NASDAQ:SRPT) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
How much debt does Sarepta Therapeutics have?
As you can see below, Sarepta Therapeutics had $1.10 billion in debt as of June 2022, roughly the same as the previous year. You can click on the graph for more details. But on the flip side, it also has $1.93 billion in cash, resulting in a net cash position of $827.1 million.
How healthy is Sarepta Therapeutics’ track record?
Zooming in on the latest balance sheet data, we can see that Sarepta Therapeutics had liabilities of US$545.6 million due within 12 months and liabilities of US$1.72 billion due beyond. As compensation for these obligations, it had cash of US$1.93 billion as well as receivables valued at US$230.3 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $112.1 million.
This indicates that Sarepta Therapeutics’ balance sheet looks quite strong, with its total liabilities roughly equal to its cash. So while it’s hard to imagine the US$9.97 billion company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Despite its notable liabilities, Sarepta Therapeutics has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Sarepta Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Sarepta Therapeutics posted 12-month revenue of $835 million, a 39% gain, although it reported no earnings before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.
So how risky is Sarepta Therapeutics?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And last year, Sarepta Therapeutics posted a loss in earnings before interest and taxes (EBIT), actually. Indeed, during this period, it burned $348 million in cash and suffered a loss of $507 million. Given that it only has net cash of US$827.1 million, the company may need to raise more capital if it does not break even soon. Sarepta Therapeutics’ revenue growth has shone over the past year, so it may well be in a position to turn a profit in due course. By investing before these profits, shareholders take on more risk in the hope of greater rewards. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Sarepta Therapeutics, and understanding them should be part of your investment process.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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