Is Editas Medicine (NASDAQ:EDIT) Using Too Much Debt?

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.' 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 Editas Medicine, Inc. (NASDAQ:EDIT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Editas Medicine

How Much Debt Does Editas Medicine Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Editas Medicine had US$28.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$625.3m in cash, so it actually has US$596.4m net cash.

A Look At Editas Medicine's Liabilities

According to the last reported balance sheet, Editas Medicine had liabilities of US$64.0m due within 12 months, and liabilities of US$78.3m due beyond 12 months. On the other hand, it had cash of US$625.3m and US$672.0k worth of receivables due within a year. So it actually has US$483.7m more liquid assets than total liabilities.

This surplus suggests that Editas Medicine has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Editas Medicine boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Editas Medicine'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 Editas Medicine wasn't profitable at an EBIT level, but managed to grow its revenue by 149%, to US$81m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Editas Medicine?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Editas Medicine had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$180m of cash and made a loss of US$167m. While this does make the company a bit risky, it's important to remember it has net cash of US$596.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Editas Medicine'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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Editas Medicine 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.
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