Is Adaptive Biotechnologies (NASDAQ:ADPT) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Adaptive Biotechnologies Corporation (NASDAQ:ADPT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Adaptive Biotechnologies

What Is Adaptive Biotechnologies's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Adaptive Biotechnologies had debt of US$130.7m, up from US$125.4m in one year. However, it does have US$346.4m in cash offsetting this, leading to net cash of US$215.7m.

How Healthy Is Adaptive Biotechnologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Adaptive Biotechnologies had liabilities of US$88.0m due within 12 months and liabilities of US$264.8m due beyond that. On the other hand, it had cash of US$346.4m and US$39.0m worth of receivables due within a year. So it can boast US$32.5m more liquid assets than total liabilities.

This surplus suggests that Adaptive Biotechnologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Adaptive Biotechnologies 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 Adaptive Biotechnologies'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.

In the last year Adaptive Biotechnologies had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to US$170m. We would much prefer see growth.

So How Risky Is Adaptive Biotechnologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Adaptive Biotechnologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$167m of cash and made a loss of US$225m. However, it has net cash of US$215.7m, so it has a bit of time before it will need more capital. 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. 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. Be aware that Adaptive Biotechnologies is showing 4 warning signs in our investment analysis , you should know about...

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.