Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” 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 can see that Invitae Corporation (NYSE: NVTA) uses debt in its business. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Invitae
How much debt does Invitae have?
You can click on the graph below for historical figures, but it shows that as of September 2021, Invitae had a debt of US $ 1.57 billion, an increase from US $ 279.9 million, over a year. However, he also had $ 1.24 billion in cash, so his net debt is $ 331.6 million.
A look at the responsibilities of Invitae
We can see from the most recent balance sheet that Invitae had liabilities of US $ 156.2 million maturing within one year and liabilities of US $ 1.81 billion maturing beyond that. . On the other hand, he had $ 1.24 billion in cash and $ 62.1 million in receivables due within a year. It therefore has a liability totaling US $ 660.1 million more than its cash and short-term receivables combined.
Considering that Invitae has a market capitalization of US $ 3.54 billion, it is hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether Invitae can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Year over 12 months, Invitae reported revenue of US $ 435 million, a gain of 77%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.
Even though Invitae has managed to increase its turnover quite skillfully, the hard truth is that it is losing money on the EBIT line. Its EBIT loss was US $ 703 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we think the record is far from up to par, although it could improve over time. Another reason to be cautious is that US $ 542 million of negative free cash flow has been bled in the past twelve months. In short, it’s a really risky title. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Invitae has 4 warning signs (and 1 which is significant) we think you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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 any of the stocks mentioned.