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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aeglea BioTherapeutics, Inc. (NASDAQ:AGLE) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Aeglea BioTherapeutics Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Aeglea BioTherapeutics had debt of US$78.0k, up from none in one year. But it also has US$123.7m in cash to offset that, meaning it has US$123.6m net cash.
A Look At Aeglea BioTherapeutics’s Liabilities
Zooming in on the latest balance sheet data, we can see that Aeglea BioTherapeutics had liabilities of US$11.8m due within 12 months and liabilities of US$424.0k due beyond that. Offsetting these obligations, it had cash of US$123.7m as well as receivables valued at US$300.0k due within 12 months. So it actually has US$111.8m more liquid assets than total liabilities.
This excess liquidity is a great indication that Aeglea BioTherapeutics’s balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Aeglea BioTherapeutics boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Aeglea BioTherapeutics 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.
Over 12 months, Aeglea BioTherapeutics saw its revenue drop to US$2.4m, which is a fall of 59%. That makes us nervous, to say the least.
So How Risky Is Aeglea BioTherapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Aeglea BioTherapeutics had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$41m of cash and made a loss of US$53m. While this does make the company a bit risky, it’s important to remember it has net cash of US$124m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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 I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Aeglea BioTherapeutics insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.