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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies GenMark Diagnostics, Inc. ( NASDAQ:GNMK ) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
What Is GenMark Diagnostics's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 GenMark Diagnostics had debt of US$48.3m, up from US$28.6m in one year. However, it also had US$41.4m in cash, and so its net debt is US$6.91m.
A Look At GenMark Diagnostics's Liabilities
According to the last reported balance sheet, GenMark Diagnostics had liabilities of US$17.7m due within 12 months, and liabilities of US$54.7m due beyond 12 months. On the other hand, it had cash of US$41.4m and US$6.76m worth of receivables due within a year. So it has liabilities totalling US$24.3m more than its cash and near-term receivables, combined.
Of course, GenMark Diagnostics has a market capitalization of US$345.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GenMark Diagnostics can strengthen its balance sheet over time. 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 GenMark Diagnostics managed to grow its revenue by 19%, to US$75m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, GenMark Diagnostics had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$44m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$34m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like GenMark Diagnostics 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 .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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