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Is Global Blood Therapeutics (NASDAQ:GBT) Using Debt In A Risky Way?

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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 Global Blood Therapeutics, Inc. (NASDAQ:GBT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Global Blood Therapeutics

What Is Global Blood Therapeutics's Net Debt?

As you can see below, at the end of September 2021, Global Blood Therapeutics had US$149.5m of debt, up from US$73.9m a year ago. Click the image for more detail. However, it does have US$386.1m in cash offsetting this, leading to net cash of US$236.6m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Global Blood Therapeutics' Liabilities

According to the last reported balance sheet, Global Blood Therapeutics had liabilities of US$74.1m due within 12 months, and liabilities of US$225.3m due beyond 12 months. On the other hand, it had cash of US$386.1m and US$23.9m worth of receivables due within a year. So it actually has US$110.6m more liquid assets than total liabilities.

This surplus suggests that Global Blood Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Global Blood Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Global Blood Therapeutics 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.

In the last year Global Blood Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 113%, to US$180m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Global Blood Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Global Blood Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$241m of cash and made a loss of US$277m. But at least it has US$236.6m on the balance sheet to spend on growth, near-term. Importantly, Global Blood Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 2 warning signs with Global Blood Therapeutics , and understanding them should be part of your investment process.

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.

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.