Health Check: How Prudently Does Virgin Galactic Holdings (NYSE:SPCE) Use Debt?

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.' 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. We note that Virgin Galactic Holdings, Inc. (NYSE:SPCE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Virgin Galactic Holdings

What Is Virgin Galactic Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Virgin Galactic Holdings had debt of US$414.5m, up from US$363.0k in one year. However, its balance sheet shows it holds US$867.3m in cash, so it actually has US$452.9m net cash.

How Healthy Is Virgin Galactic Holdings' Balance Sheet?

The latest balance sheet data shows that Virgin Galactic Holdings had liabilities of US$142.9m due within a year, and liabilities of US$457.2m falling due after that. On the other hand, it had cash of US$867.3m and US$3.10m worth of receivables due within a year. So it actually has US$270.4m more liquid assets than total liabilities.

This surplus suggests that Virgin Galactic Holdings is using debt in a way that is appears to be both safe and conservative. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Virgin Galactic Holdings 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.

While it hasn't made a profit, at least Virgin Galactic Holdings booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Virgin Galactic Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$254m of cash and made a loss of US$316m. However, it has net cash of US$452.9m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Virgin Galactic Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.