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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Pacific Biosciences of California, Inc. (NASDAQ:PACB) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Pacific Biosciences of California Carry?
As you can see below, at the end of March 2021, Pacific Biosciences of California had US$895.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.16b in cash, so it actually has US$264.6m net cash.
How Healthy Is Pacific Biosciences of California's Balance Sheet?
We can see from the most recent balance sheet that Pacific Biosciences of California had liabilities of US$33.7m falling due within a year, and liabilities of US$938.6m due beyond that. On the other hand, it had cash of US$1.16b and US$12.9m worth of receivables due within a year. So it actually has US$200.9m more liquid assets than total liabilities.
This surplus suggests that Pacific Biosciences of California has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pacific Biosciences of California boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pacific Biosciences of California'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, Pacific Biosciences of California reported revenue of US$92m, which is a gain of 2.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Pacific Biosciences of California?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Pacific Biosciences of California had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$80m of cash and made a loss of US$59m. Given it only has net cash of US$264.6m, the company may need to raise more capital if it doesn't reach break-even soon. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Pacific Biosciences of California you should be aware of, and 1 of them is a bit unpleasant.
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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