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.' 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 Editas Medicine, Inc. (NASDAQ:EDIT) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Editas Medicine
What Is Editas Medicine's Net Debt?
As you can see below, at the end of March 2022, Editas Medicine had US$23.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$488.4m in cash, so it actually has US$465.2m net cash.
A Look At Editas Medicine's Liabilities
The latest balance sheet data shows that Editas Medicine had liabilities of US$36.5m due within a year, and liabilities of US$73.8m falling due after that. Offsetting this, it had US$488.4m in cash and US$1.37m in receivables that were due within 12 months. So it actually has US$379.4m more liquid assets than total liabilities.
This excess liquidity suggests that Editas Medicine is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Editas Medicine boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Editas Medicine'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.
Over 12 months, Editas Medicine made a loss at the EBIT level, and saw its revenue drop to US$32m, which is a fall of 61%. To be frank that doesn't bode well.
So How Risky Is Editas Medicine?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Editas Medicine had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$174m and booked a US$184m accounting loss. But the saving grace is the US$465.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Editas Medicine (1 is significant) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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