Is Applied Genetic Technologies (NASDAQ:AGTC) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Applied Genetic Technologies Corporation (NASDAQ:AGTC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Applied Genetic Technologies

How Much Debt Does Applied Genetic Technologies Carry?

As you can see below, at the end of March 2021, Applied Genetic Technologies had US$9.93m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$111.0m in cash, so it actually has US$101.1m net cash.

How Strong Is Applied Genetic Technologies' Balance Sheet?

According to the last reported balance sheet, Applied Genetic Technologies had liabilities of US$16.6m due within 12 months, and liabilities of US$16.1m due beyond 12 months. Offsetting this, it had US$111.0m in cash and US$169.0k in receivables that were due within 12 months. So it actually has US$78.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Applied Genetic Technologies' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Applied Genetic Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Applied Genetic Technologies'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 Applied Genetic Technologies doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Applied Genetic Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Applied Genetic Technologies 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$53m and booked a US$60m accounting loss. But at least it has US$101.1m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 4 warning signs for Applied Genetic Technologies (2 are concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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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