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Is Sutro Biopharma (NASDAQ:STRO) Using Debt In A Risky Way?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Sutro Biopharma, Inc. (NASDAQ:STRO) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sutro Biopharma

How Much Debt Does Sutro Biopharma Carry?

The chart below, which you can click on for greater detail, shows that Sutro Biopharma had US$14.3m in debt in March 2019; about the same as the year before. However, it does have US$170.6m in cash offsetting this, leading to net cash of US$156.3m.

NasdaqGM:STRO Historical Debt, July 31st 2019

How Strong Is Sutro Biopharma's Balance Sheet?

We can see from the most recent balance sheet that Sutro Biopharma had liabilities of US$31.1m falling due within a year, and liabilities of US$40.6m due beyond that. Offsetting this, it had US$170.6m in cash and US$3.34m in receivables that were due within 12 months. So it actually has US$102.2m more liquid assets than total liabilities.

This surplus strongly suggests that Sutro Biopharma has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Sutro Biopharma has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sutro Biopharma 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.

Over 12 months, Sutro Biopharma saw its revenue drop to US$41m, which is a fall of 2.8%. That's not what we would hope to see.

So How Risky Is Sutro Biopharma?

Although Sutro Biopharma had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$6.1m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Sutro Biopharma I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.