David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that NovoCure Limited (NASDAQ:NVCR) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
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What Is NovoCure’s Net Debt?
As you can see below, NovoCure had US$568.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$921.2m in cash to offset that, meaning it has US$353.3m net cash.
A Look At NovoCure’s Liabilities
We can see from the most recent balance sheet that NovoCure had liabilities of US$157.2m falling due within a year, and liabilities of US$595.5m due beyond that. Offsetting this, it had US$921.2m in cash and US$88.3m in receivables that were due within 12 months. So it actually has US$256.9m more liquid assets than total liabilities.
This excess liquidity suggests that NovoCure is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that NovoCure has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NovoCure’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.
Over 12 months, NovoCure made a loss at the EBIT level, and saw its revenue drop to US$504m, which is a fall of 7.1%. We would much prefer see growth.
So How Risky Is NovoCure?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NovoCure had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$89m of cash and made a loss of US$197m. Given it only has net cash of US$353.3m, the company may need to raise more capital if it doesn’t reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 3 warning signs for NovoCure you should be aware of, and 1 of them is potentially serious.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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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.