Precision BioSciences (NASDAQ:DTIL) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Precision BioSciences, Inc. (NASDAQ:DTIL) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Precision BioSciences

What Is Precision BioSciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Precision BioSciences had US$2.45m of debt, an increase on none, over one year. However, it does have US$160.5m in cash offsetting this, leading to net cash of US$158.0m.

How Healthy Is Precision BioSciences' Balance Sheet?

The latest balance sheet data shows that Precision BioSciences had liabilities of US$36.5m due within a year, and liabilities of US$89.3m falling due after that. Offsetting these obligations, it had cash of US$160.5m as well as receivables valued at US$488.0k due within 12 months. So it actually has US$35.2m 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. Simply put, the fact that Precision BioSciences 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 ultimately the future profitability of the business will decide if Precision BioSciences 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.

In the last year Precision BioSciences wasn't profitable at an EBIT level, but managed to grow its revenue by 437%, to US$118m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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$6.0m of cash and made a loss of US$32m. However, it has net cash of US$158.0m, so it has a bit of time before it will need more capital. Importantly, Precision BioSciences's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Precision BioSciences (of which 1 is concerning!) you should know about.

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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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.