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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. Importantly, Global Blood Therapeutics, Inc. (NASDAQ:GBT) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Global Blood Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Global Blood Therapeutics had US$73.9m of debt, an increase on none, over one year. But on the other hand it also has US$531.9m in cash, leading to a US$458.0m net cash position.
A Look At Global Blood Therapeutics' Liabilities
Zooming in on the latest balance sheet data, we can see that Global Blood Therapeutics had liabilities of US$77.9m due within 12 months and liabilities of US$155.7m due beyond that. Offsetting these obligations, it had cash of US$531.9m as well as receivables valued at US$14.1m due within 12 months. So it actually has US$312.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Global Blood Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Global Blood Therapeutics 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 Global Blood 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.
While it hasn't made a profit, at least Global Blood Therapeutics booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Global Blood Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Global Blood Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$236m of cash and made a loss of US$282m. But at least it has US$458.0m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Global Blood Therapeutics that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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