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 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. As with many other companies Natera, Inc. (NASDAQ:NTRA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Natera Carry?

The chart below, which you can click on for greater detail, shows that Natera had US$364.0m in debt in June 2024; about the same as the year before. But it also has US$887.1m in cash to offset that, meaning it has US$523.1m net cash.

How Strong Is Natera's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Natera had liabilities of US$314.6m due within 12 months and liabilities of US$365.9m due beyond that. Offsetting this, it had US$887.1m in cash and US$335.9m in receivables that were due within 12 months. So it can boast US$542.6m 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. Simply put, the fact that Natera has more cash than debt is arguably a good indication that it can manage its debt safely. 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.

Over 12 months, Natera reported revenue of US$1.4b, which is a gain of 46%, although it did not report any earnings before interest and tax. 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. Indeed, in that time it burnt through US$118m of cash and made a loss of US$292m. While this does make the company a bit risky, it's important to remember it has net cash of US$523.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Natera may be on a path to profitability. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Natera has 1 warning sign we think you should be aware of.

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.