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.' 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. We can see that G1 Therapeutics, Inc. (NASDAQ:GTHX) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 G1 Therapeutics's Debt?
As you can see below, at the end of March 2022, G1 Therapeutics had US$75.6m of debt, up from US$29.9m a year ago. Click the image for more detail. But it also has US$183.0m in cash to offset that, meaning it has US$107.4m net cash.
How Healthy Is G1 Therapeutics' Balance Sheet?
According to the last reported balance sheet, G1 Therapeutics had liabilities of US$35.0m due within 12 months, and liabilities of US$83.1m due beyond 12 months. On the other hand, it had cash of US$183.0m and US$7.62m worth of receivables due within a year. So it actually has US$72.5m more liquid assets than total liabilities.
This surplus suggests that G1 Therapeutics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that G1 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 it is future earnings, more than anything, that will determine G1 Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, G1 Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$24m, which is a fall of 59%. To be frank that doesn't bode well.
So How Risky Is G1 Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year G1 Therapeutics 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$143m and booked a US$171m accounting loss. But at least it has US$107.4m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that G1 Therapeutics is showing 2 warning signs in our investment analysis , you should know about...
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.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here