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. As with many other companies DexCom, Inc. (NASDAQ:DXCM) 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DexCom

What Is DexCom's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 DexCom had US$1.65b of debt, an increase on US$1.05b, over one year. However, it does have US$2.60b in cash offsetting this, leading to net cash of US$958.0m.

A Look At DexCom's Liabilities

The latest balance sheet data shows that DexCom had liabilities of US$506.4m due within a year, and liabilities of US$1.83b falling due after that. Offsetting this, it had US$2.60b in cash and US$370.0m in receivables that were due within 12 months. So it actually has US$639.9m more liquid assets than total liabilities.

Having regard to DexCom's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$34.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that DexCom has more cash than debt is arguably a good indication that it can manage its debt safely.

Pleasingly, DexCom is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 231% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DexCom 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While DexCom has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, DexCom produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case DexCom has US$958.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 231% year-on-year EBIT growth. So is DexCom's debt a risk? It doesn't seem so to us. 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 DexCom .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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