Does Virgin Galactic Holdings (NYSE:SPCE) Have A Healthy Balance Sheet?

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 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 can see that Virgin Galactic Holdings, Inc. (NYSE:SPCE) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Virgin Galactic Holdings

How Much Debt Does Virgin Galactic Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Virgin Galactic Holdings had US$414.6m of debt, an increase on US$332.0k, over one year. However, it does have US$917.6m in cash offsetting this, leading to net cash of US$503.0m.

A Look At Virgin Galactic Holdings' Liabilities

According to the last reported balance sheet, Virgin Galactic Holdings had liabilities of US$156.9m due within 12 months, and liabilities of US$461.0m due beyond 12 months. Offsetting this, it had US$917.6m in cash and US$3.60m in receivables that were due within 12 months. So it can boast US$303.3m more liquid assets than total liabilities.

It's good to see that Virgin Galactic Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Virgin Galactic Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Virgin Galactic Holdings'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 Virgin Galactic Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 495%, to US$3.4m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Virgin Galactic Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Virgin Galactic Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$280m of cash and made a loss of US$333m. But at least it has US$503.0m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Virgin Galactic Holdings 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Virgin Galactic Holdings that you should be aware of.

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.

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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.