Is Precision BioSciences (NASDAQ:DTIL) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that DTIL is potentially overvalued!

How Much Debt Does Precision BioSciences Carry?

As you can see below, at the end of September 2022, Precision BioSciences had US$22.2m of debt, up from US$2.45m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$212.1m in cash, so it actually has US$189.9m net cash.

How Healthy Is Precision BioSciences' Balance Sheet?

The latest balance sheet data shows that Precision BioSciences had liabilities of US$61.1m due within a year, and liabilities of US$126.2m falling due after that. Offsetting these obligations, it had cash of US$212.1m as well as receivables valued at US$715.0k due within 12 months. So it can boast US$25.4m more liquid assets than total liabilities.

This excess liquidity suggests that Precision BioSciences is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Precision BioSciences 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Precision BioSciences had a loss before interest and tax, and actually shrunk its revenue by 82%, to US$21m. 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. And over the same period it saw negative free cash outflow of US$52m and booked a US$105m accounting loss. However, it has net cash of US$189.9m, 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. Case in point: We've spotted 2 warning signs for Precision BioSciences you should be aware of, and 1 of them shouldn't be ignored.

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.