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 ViewRay, Inc. (NASDAQ:VRAY) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is ViewRay's Debt?
As you can see below, ViewRay had US$55.6m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$179.5m in cash offsetting this, leading to net cash of US$123.9m.
How Strong Is ViewRay's Balance Sheet?
The latest balance sheet data shows that ViewRay had liabilities of US$68.3m due within a year, and liabilities of US$60.9m falling due after that. Offsetting these obligations, it had cash of US$179.5m as well as receivables valued at US$22.1m due within 12 months. So it actually has US$72.4m more liquid assets than total liabilities.
It's good to see that ViewRay has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that ViewRay has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ViewRay'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, ViewRay made a loss at the EBIT level, and saw its revenue drop to US$66m, which is a fall of 26%. To be frank that doesn't bode well.
So How Risky Is ViewRay?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year ViewRay had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$80m of cash and made a loss of US$110m. However, it has net cash of US$123.9m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that ViewRay is showing 3 warning signs in our investment analysis , and 1 of those is significant...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. 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.
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