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

Simply Wall St

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. Importantly, Global Blood Therapeutics, Inc. (NASDAQ:GBT) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Global Blood Therapeutics

What Is Global Blood Therapeutics's Debt?

As you can see below, at the end of March 2020, Global Blood Therapeutics had US$73.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$530.8m in cash, so it actually has US$457.1m net cash.

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

A Look At Global Blood Therapeutics's Liabilities

The latest balance sheet data shows that Global Blood Therapeutics had liabilities of US$62.2m due within a year, and liabilities of US$155.3m falling due after that. Offsetting these obligations, it had cash of US$530.8m as well as receivables valued at US$4.58m due within 12 months. So it actually has US$317.8m 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. 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 Global Blood Therapeutics'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.

In the last year Global Blood Therapeutics managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Global Blood Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Global Blood Therapeutics had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$238.7m and booked a US$290.9m accounting loss. But at least it has US$457.1m 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Global Blood Therapeutics that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.