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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Twist Bioscience Corporation (NASDAQ:TWST) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Twist Bioscience's Net Debt?
The image below, which you can click on for greater detail, shows that Twist Bioscience had debt of US$2.37m at the end of June 2021, a reduction from US$5.50m over a year. But on the other hand it also has US$519.4m in cash, leading to a US$517.0m net cash position.
How Healthy Is Twist Bioscience's Balance Sheet?
According to the last reported balance sheet, Twist Bioscience had liabilities of US$54.8m due within 12 months, and liabilities of US$60.0m due beyond 12 months. Offsetting these obligations, it had cash of US$519.4m as well as receivables valued at US$28.1m due within 12 months. So it actually has US$432.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Twist Bioscience could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Twist Bioscience 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 Twist Bioscience 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 Twist Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to US$127m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Twist Bioscience?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Twist Bioscience had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$124m and booked a US$135m accounting loss. But at least it has US$517.0m on the balance sheet to spend on growth, near-term. Twist Bioscience's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Twist Bioscience has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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