Is Fulgent Genetics (NASDAQ:FLGT) 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 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 Fulgent Genetics, Inc. (NASDAQ:FLGT) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fulgent Genetics

How Much Debt Does Fulgent Genetics Carry?

The image below, which you can click on for greater detail, shows that Fulgent Genetics had debt of US$5.89m at the end of September 2023, a reduction from US$20.5m over a year. But it also has US$467.8m in cash to offset that, meaning it has US$461.9m net cash.

How Healthy Is Fulgent Genetics' Balance Sheet?

The latest balance sheet data shows that Fulgent Genetics had liabilities of US$61.4m due within a year, and liabilities of US$35.1m falling due after that. Offsetting these obligations, it had cash of US$467.8m as well as receivables valued at US$54.6m due within 12 months. So it actually has US$425.9m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Fulgent Genetics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Fulgent Genetics made a loss at the EBIT level, and saw its revenue drop to US$286m, which is a fall of 64%. To be frank that doesn't bode well.

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$21m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Fulgent Genetics you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.