Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, DexCom, Inc. (NASDAQ:DXCM) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 DexCom's Debt?

You can click the graphic below for the historical numbers, but it shows that DexCom had US$2.44b of debt in June 2024, down from US$3.20b, one year before. But it also has US$3.12b in cash to offset that, meaning it has US$682.9m net cash.

How Strong Is DexCom's Balance Sheet?

We can see from the most recent balance sheet that DexCom had liabilities of US$1.72b falling due within a year, and liabilities of US$2.64b due beyond that. On the other hand, it had cash of US$3.12b and US$998.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$245.5m.

Having regard to DexCom's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$28.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, DexCom boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that DexCom has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DexCom'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DexCom may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, DexCom generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that DexCom has US$682.9m in net cash. And it impressed us with free cash flow of US$666m, being 99% of its EBIT. So we don't think DexCom's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for DexCom you should know about.

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.