Is Precision BioSciences (NASDAQ:DTIL) Using Debt In A Risky Way?

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. As with many other companies Precision BioSciences, Inc. (NASDAQ:DTIL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Precision BioSciences

How Much Debt Does Precision BioSciences Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Precision BioSciences had US$22.2m of debt, an increase on US$2.48m, over one year. But it also has US$189.6m in cash to offset that, meaning it has US$167.4m net cash.

How Healthy Is Precision BioSciences' Balance Sheet?

We can see from the most recent balance sheet that Precision BioSciences had liabilities of US$59.7m falling due within a year, and liabilities of US$118.1m due beyond that. Offsetting this, it had US$189.6m in cash and US$720.0k in receivables that were due within 12 months. So it can boast US$12.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Precision BioSciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Precision BioSciences boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Precision BioSciences'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.

Over 12 months, Precision BioSciences made a loss at the EBIT level, and saw its revenue drop to US$25m, which is a fall of 78%. That makes us nervous, to say the least.

So How Risky Is Precision BioSciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Precision BioSciences had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$49m of cash and made a loss of US$112m. However, it has net cash of US$167.4m, 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Precision BioSciences (of which 1 is a bit concerning!) 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.