Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Fate Therapeutics, Inc. (NASDAQ:FATE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Fate Therapeutics's Debt?
The image below, which you can click on for greater detail, shows that Fate Therapeutics had debt of US$13.9m at the end of September 2019, a reduction from US$14.9m over a year. But on the other hand it also has US$302.8m in cash, leading to a US$288.9m net cash position.
How Strong Is Fate Therapeutics's Balance Sheet?
We can see from the most recent balance sheet that Fate Therapeutics had liabilities of US$40.6m falling due within a year, and liabilities of US$31.6m due beyond that. On the other hand, it had cash of US$302.8m and US$500.0k worth of receivables due within a year. So it actually has US$231.2m more liquid assets than total liabilities.
It's good to see that Fate Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Fate Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fate Therapeutics can strengthen its balance sheet over time. 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 Fate Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by132%, to US$9.5m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Fate Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Fate Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$75m of cash and made a loss of US$86m. But the saving grace is the US$288.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Fate Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Fate Therapeutics insider transactions.
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.
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