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Is NovoCure (NASDAQ:NVCR) A Risky Investment?

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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

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Check out our latest analysis for NovoCure

What Is NovoCure's Net Debt?

As you can see below, NovoCure had US$149.5m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$326.1m in cash offsetting this, leading to net cash of US$176.6m.

NasdaqGS:NVCR Historical Debt April 7th 2020
NasdaqGS:NVCR Historical Debt April 7th 2020

A Look At NovoCure's Liabilities

According to the last reported balance sheet, NovoCure had liabilities of US$86.3m due within 12 months, and liabilities of US$175.3m due beyond 12 months. On the other hand, it had cash of US$326.1m and US$80.2m worth of receivables due within a year. So it can boast US$144.7m more liquid assets than total liabilities.

This short term liquidity is a sign that NovoCure could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NovoCure boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year NovoCure wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to US$351m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NovoCure?

While NovoCure lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 42% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with NovoCure .

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.