The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Illumina, Inc. (NASDAQ:ILMN) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Illumina
How Much Debt Does Illumina Carry?
You can click the graphic below for the historical numbers, but it shows that Illumina had US$1.49b of debt in October 2023, down from US$1.74b, one year before. On the flip side, it has US$933.0m in cash leading to net debt of about US$556.0m.
A Look At Illumina's Liabilities
According to the last reported balance sheet, Illumina had liabilities of US$1.48b due within 12 months, and liabilities of US$2.74b due beyond 12 months. Offsetting these obligations, it had cash of US$933.0m as well as receivables valued at US$709.0m due within 12 months. So it has liabilities totalling US$2.58b more than its cash and near-term receivables, combined.
Since publicly traded Illumina shares are worth a very impressive total of US$20.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Illumina'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 Illumina had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to US$4.5b. That's not what we would hope to see.
Caveat Emptor
Importantly, Illumina had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$112m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$1.1b. So to be blunt we do think it is risky. For riskier companies like Illumina I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.