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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Exact Sciences Corporation (NASDAQ:EXAS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Exact Sciences

What Is Exact Sciences's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Exact Sciences had debt of US$2.36b, up from US$2.23b in one year. On the flip side, it has US$734.4m in cash leading to net debt of about US$1.63b.

How Healthy Is Exact Sciences' Balance Sheet?

The latest balance sheet data shows that Exact Sciences had liabilities of US$476.5m due within a year, and liabilities of US$2.82b falling due after that. Offsetting this, it had US$734.4m in cash and US$203.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.36b.

This deficit isn't so bad because Exact Sciences is worth a massive US$10.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Exact Sciences'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 Exact Sciences wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$2.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Exact Sciences had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$346m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$24m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Exact Sciences I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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