Fulgent Genetics (NASDAQ:FLGT) Has Debt But No Earnings; Should You Worry?

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. We note that Fulgent Genetics, Inc. (NASDAQ:FLGT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fulgent Genetics

What Is Fulgent Genetics's Net Debt?

As you can see below, Fulgent Genetics had US$4.56m of debt at June 2023, down from US$20.8m a year prior. However, its balance sheet shows it holds US$458.4m in cash, so it actually has US$453.9m net cash.

How Healthy Is Fulgent Genetics' Balance Sheet?

The latest balance sheet data shows that Fulgent Genetics had liabilities of US$64.8m due within a year, and liabilities of US$26.4m falling due after that. Offsetting this, it had US$458.4m in cash and US$39.7m in receivables that were due within 12 months. So it can boast US$406.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Fulgent Genetics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Fulgent Genetics 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 it is future earnings, more than anything, that will determine Fulgent Genetics'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.

Over 12 months, Fulgent Genetics made a loss at the EBIT level, and saw its revenue drop to US$307m, which is a fall of 67%. That makes us nervous, to say the least.

So How Risky Is Fulgent Genetics?

Although Fulgent Genetics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$31m. 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. 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. For example - Fulgent Genetics has 1 warning sign we think you should be aware of.

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.

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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.