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.' 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 note that LogicBio Therapeutics, Inc. (NASDAQ:LOGC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is LogicBio Therapeutics's Debt?
The chart below, which you can click on for greater detail, shows that LogicBio Therapeutics had US$10.0m in debt in December 2020; about the same as the year before. But on the other hand it also has US$70.1m in cash, leading to a US$60.1m net cash position.
How Healthy Is LogicBio Therapeutics' Balance Sheet?
The latest balance sheet data shows that LogicBio Therapeutics had liabilities of US$6.15m due within a year, and liabilities of US$13.1m falling due after that. On the other hand, it had cash of US$70.1m and US$263.0k worth of receivables due within a year. So it can boast US$51.1m more liquid assets than total liabilities.
It's good to see that LogicBio Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, LogicBio 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 it is future earnings, more than anything, that will determine LogicBio 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.
While it hasn't made a profit, at least LogicBio Therapeutics booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is LogicBio Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year LogicBio Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$29m of cash and made a loss of US$33m. However, it has net cash of US$60.1m, so it has a bit of time before it will need more capital. 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. 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. Be aware that LogicBio Therapeutics is showing 3 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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