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.' 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. As with many other companies Precision BioSciences, Inc. (NASDAQ:DTIL) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Precision BioSciences
How Much Debt Does Precision BioSciences Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Precision BioSciences had debt of US$2.43m, up from none in one year. However, it does have US$173.9m in cash offsetting this, leading to net cash of US$171.5m.
How Strong Is Precision BioSciences' Balance Sheet?
According to the last reported balance sheet, Precision BioSciences had liabilities of US$36.3m due within 12 months, and liabilities of US$93.3m due beyond 12 months. Offsetting this, it had US$173.9m in cash and US$488.0k in receivables that were due within 12 months. So it actually has US$44.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Precision BioSciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Precision BioSciences boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Precision BioSciences'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 Precision BioSciences wasn't profitable at an EBIT level, but managed to grow its revenue by 421%, to US$101m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Precision BioSciences?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Precision BioSciences lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$3.9m and booked a US$47m accounting loss. However, it has net cash of US$171.5m, so it has a bit of time before it will need more capital. The good news for shareholders is that Precision BioSciences has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 3 warning signs for Precision BioSciences you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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