Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Natera, Inc. (NASDAQ:NTRA) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Natera Carry?
The chart below, which you can click on for greater detail, shows that Natera had US$363.3m in debt in December 2023; about the same as the year before. But on the other hand it also has US$879.0m in cash, leading to a US$515.6m net cash position.
A Look At Natera's Liabilities
We can see from the most recent balance sheet that Natera had liabilities of US$307.3m falling due within a year, and liabilities of US$369.1m due beyond that. Offsetting these obligations, it had cash of US$879.0m as well as receivables valued at US$278.3m due within 12 months. So it actually has US$480.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Natera could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Natera boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Natera can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Natera wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to US$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Natera?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Natera had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$286m and booked a US$435m accounting loss. But the saving grace is the US$515.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Natera's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Natera that you should be aware of before investing here.
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.