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Is Pliant Therapeutics (NASDAQ:PLRX) Using Too Much Debt?

·4 min read

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Pliant Therapeutics, Inc. (NASDAQ:PLRX) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pliant Therapeutics

What Is Pliant Therapeutics's Net Debt?

As you can see below, at the end of June 2022, Pliant Therapeutics had US$9.87m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$163.6m in cash, leading to a US$153.7m net cash position.

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

A Look At Pliant Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Pliant Therapeutics had liabilities of US$22.6m due within 12 months and liabilities of US$14.3m due beyond that. Offsetting this, it had US$163.6m in cash and US$5.39m in receivables that were due within 12 months. So it can boast US$132.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Pliant Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pliant Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pliant 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.

In the last year Pliant Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 26%, to US$9.8m. That makes us nervous, to say the least.

So How Risky Is Pliant Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Pliant Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$89m and booked a US$109m accounting loss. With only US$153.7m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pliant Therapeutics is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.

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.

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