Is Fractyl Health (NASDAQ:GUTS) Using Debt Sensibly?

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. We can see that Fractyl Health, Inc. (NASDAQ:GUTS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fractyl Health

How Much Debt Does Fractyl Health Carry?

As you can see below, Fractyl Health had US$30.3m of debt at September 2024, down from US$54.7m a year prior. But it also has US$84.7m in cash to offset that, meaning it has US$54.3m net cash.

A Look At Fractyl Health's Liabilities

Zooming in on the latest balance sheet data, we can see that Fractyl Health had liabilities of US$15.7m due within 12 months and liabilities of US$60.9m due beyond that. Offsetting these obligations, it had cash of US$84.7m as well as receivables valued at US$22.0k due within 12 months. So it actually has US$8.08m more liquid assets than total liabilities.

This surplus suggests that Fractyl Health has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fractyl Health has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fractyl Health'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.

Since Fractyl Health doesn't have significant operating revenue, shareholders must hope it'll ramp sales of its new medical tech as soon as possible.

So How Risky Is Fractyl Health?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Fractyl Health had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$61m and booked a US$69m accounting loss. But at least it has US$54.3m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Fractyl Health (of which 2 are concerning!) you should know about.

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.