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.' 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. We note that GeneDx Holdings Corp. (NASDAQ:WGS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is GeneDx Holdings's Debt?

As you can see below, at the end of September 2024, GeneDx Holdings had US$52.0m of debt, up from US$6.25m a year ago. Click the image for more detail. But it also has US$116.5m in cash to offset that, meaning it has US$64.4m net cash.

A Look At GeneDx Holdings' Liabilities

We can see from the most recent balance sheet that GeneDx Holdings had liabilities of US$77.3m falling due within a year, and liabilities of US$127.0m due beyond that. Offsetting this, it had US$116.5m in cash and US$38.5m in receivables that were due within 12 months. So its liabilities total US$49.4m more than the combination of its cash and short-term receivables.

Given GeneDx Holdings has a market capitalization of US$2.17b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, GeneDx Holdings also has more cash than debt, so we're pretty confident 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 GeneDx Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year GeneDx Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$267m. With any luck the company will be able to grow its way to profitability.

So How Risky Is GeneDx Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that GeneDx Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$60m of cash and made a loss of US$83m. However, it has net cash of US$64.4m, so it has a bit of time before it will need more capital. GeneDx Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with GeneDx Holdings .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.