Is Cellectis (EPA:ALCLS) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cellectis S.A. (EPA:ALCLS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cellectis

What Is Cellectis's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Cellectis had debt of US$24.7m, up from none in one year. But it also has US$210.5m in cash to offset that, meaning it has US$185.8m net cash.

A Look At Cellectis' Liabilities

According to the last reported balance sheet, Cellectis had liabilities of US$46.9m due within 12 months, and liabilities of US$106.0m due beyond 12 months. Offsetting these obligations, it had cash of US$210.5m as well as receivables valued at US$21.4m due within 12 months. So it actually has US$79.0m more liquid assets than total liabilities.

This surplus suggests that Cellectis has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cellectis boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cellectis's ability to maintain a healthy balance sheet going forward. 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 Cellectis had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$59m. We would much prefer see growth.

So How Risky Is Cellectis?

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 Cellectis lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$169m and booked a US$113m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$185.8m. That means it could keep spending at its current rate for more than two years. 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. 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. Be aware that Cellectis is showing 3 warning signs in our investment analysis , you should know about...

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.

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