These 4 Measures Indicate That Fulgent Genetics (NASDAQ:FLGT) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fulgent Genetics

What Is Fulgent Genetics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Fulgent Genetics had US$21.3m of debt, an increase on US$15.0m, over one year. But on the other hand it also has US$450.5m in cash, leading to a US$429.2m net cash position.

How Strong Is Fulgent Genetics' Balance Sheet?

We can see from the most recent balance sheet that Fulgent Genetics had liabilities of US$105.3m falling due within a year, and liabilities of US$7.53m due beyond that. Offsetting these obligations, it had cash of US$450.5m as well as receivables valued at US$143.3m due within 12 months. So it can boast US$481.0m 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.

Even more impressive was the fact that Fulgent Genetics grew its EBIT by 135% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fulgent Genetics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the most recent two years, Fulgent Genetics recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Fulgent Genetics has net cash of US$429.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 135% year-on-year EBIT growth. The bottom line is that we do not find Fulgent Genetics's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fulgent Genetics is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.