Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that FibroGen, Inc. (NASDAQ:FGEN) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is FibroGen's Net Debt?
You can click the graphic below for the historical numbers, but it shows that FibroGen had US$16.8m of debt in June 2019, down from US$114.5m, one year before. But it also has US$660.8m in cash to offset that, meaning it has US$643.9m net cash.
How Strong Is FibroGen's Balance Sheet?
The latest balance sheet data shows that FibroGen had liabilities of US$82.8m due within a year, and liabilities of US$184.0m falling due after that. Offsetting these obligations, it had cash of US$660.8m as well as receivables valued at US$134.4m due within 12 months. So it actually has US$528.4m more liquid assets than total liabilities.
This short term liquidity is a sign that FibroGen could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FibroGen boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, FibroGen turned things around in the last 12 months, delivering and EBIT of US$41m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine FibroGen'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While FibroGen has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, FibroGen saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
While we empathize with investors who find debt concerning, you should keep in mind that FibroGen has net cash of US$644m, as well as more liquid assets than liabilities. So we don't have any problem with FibroGen's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of FibroGen's earnings per share history for free.
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.
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