Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fulgent Genetics, Inc. (NASDAQ:FLGT) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, 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.
What Is Fulgent Genetics's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Fulgent Genetics had US$21.0m of debt, an increase on none, over one year. But it also has US$383.8m in cash to offset that, meaning it has US$362.8m net cash.
How Healthy Is Fulgent Genetics' Balance Sheet?
The latest balance sheet data shows that Fulgent Genetics had liabilities of US$121.5m due within a year, and liabilities of US$7.61m falling due after that. Offsetting these obligations, it had cash of US$383.8m as well as receivables valued at US$153.2m due within 12 months. So it actually has US$407.9m more liquid assets than total liabilities.
This excess liquidity suggests that Fulgent Genetics is taking a careful approach to debt. 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 Fulgent Genetics has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Fulgent Genetics grew its EBIT by 36,091% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fulgent Genetics 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fulgent Genetics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Fulgent Genetics produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Fulgent Genetics has net cash of US$362.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 36,091% year-on-year EBIT growth. So is Fulgent Genetics's debt a risk? It doesn't seem so to us. 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 example, we've discovered 5 warning signs for Fulgent Genetics (2 don't sit too well with us!) that you should be aware of before investing here.
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.
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.
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