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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Fate Therapeutics, Inc. (NASDAQ:FATE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Fate Therapeutics’s Debt?
The chart below, which you can click on for greater detail, shows that Fate Therapeutics had US$14.9m in debt in June 2019; about the same as the year before. However, its balance sheet shows it holds US$162.0m in cash, so it actually has US$147.1m net cash.
How Healthy Is Fate Therapeutics’s Balance Sheet?
The latest balance sheet data shows that Fate Therapeutics had liabilities of US$29.4m due within a year, and liabilities of US$42.9m falling due after that. On the other hand, it had cash of US$162.0m and US$500.0k worth of receivables due within a year. So it actually has US$90.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Fate Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fate Therapeutics 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 ultimately the future profitability of the business will decide if Fate Therapeutics can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Fate Therapeutics managed to grow its revenue by 98%, to US$8.1m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Fate Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Fate Therapeutics had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$58m of cash and made a loss of US$76m. But the saving grace is the US$162m on the balance sheet. That means it could keep spending at its current rate for more than two years. Fate Therapeutics’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Fate Therapeutics’s profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.