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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. We can see that Applied Genetic Technologies Corporation (NASDAQ:AGTC) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Applied Genetic Technologies's Net Debt?
As you can see below, at the end of March 2021, Applied Genetic Technologies had US$9.93m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$111.0m in cash, leading to a US$101.1m net cash position.
A Look At Applied Genetic Technologies' Liabilities
We can see from the most recent balance sheet that Applied Genetic Technologies had liabilities of US$16.6m falling due within a year, and liabilities of US$16.1m due beyond that. On the other hand, it had cash of US$111.0m and US$169.0k worth of receivables due within a year. So it can boast US$78.5m more liquid assets than total liabilities.
This luscious liquidity implies that Applied Genetic Technologies' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Applied Genetic Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Applied Genetic Technologies 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.
Since Applied Genetic Technologies doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Applied Genetic Technologies?
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 Applied Genetic Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$53m of cash and made a loss of US$60m. But at least it has US$101.1m on the balance sheet to spend on growth, near-term. 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. 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. To that end, you should learn about the 4 warning signs we've spotted with Applied Genetic Technologies (including 2 which are a bit unpleasant) .
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.
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