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. Importantly, Invitae Corporation (NYSE:NVTA) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Invitae Carry?
As you can see below, at the end of September 2021, Invitae had US$1.57b of debt, up from US$279.9m a year ago. Click the image for more detail. On the flip side, it has US$1.24b in cash leading to net debt of about US$331.6m.
A Look At Invitae's Liabilities
The latest balance sheet data shows that Invitae had liabilities of US$156.2m due within a year, and liabilities of US$1.81b falling due after that. Offsetting these obligations, it had cash of US$1.24b as well as receivables valued at US$62.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$660.1m.
Invitae has a market capitalization of US$2.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Invitae's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Invitae wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to US$435m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Invitae still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$703m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$542m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Invitae that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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