Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is PhaseBio Pharmaceuticals's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 PhaseBio Pharmaceuticals had US$9.73m of debt, an increase on US$7.5, over one year. But it also has US$81.8m in cash to offset that, meaning it has US$72.0m net cash.
A Look At PhaseBio Pharmaceuticals's Liabilities
According to the last reported balance sheet, PhaseBio Pharmaceuticals had liabilities of US$5.96m due within 12 months, and liabilities of US$9.44m due beyond 12 months. On the other hand, it had cash of US$81.8m and US$583.0k worth of receivables due within a year. So it actually has US$67.0m more liquid assets than total liabilities.
This surplus liquidity suggests that PhaseBio Pharmaceuticals's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PhaseBio Pharmaceuticals 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 PhaseBio Pharmaceuticals 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.
Over 12 months, PhaseBio Pharmaceuticals reported revenue of US$1.9m, which is a gain of 351%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is PhaseBio Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PhaseBio Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$35m and booked a US$33m accounting loss. However, it has net cash of US$72.0m, so it has a bit of time before it will need more capital. The good news for shareholders is that PhaseBio Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with PhaseBio Pharmaceuticals (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.