Fortress Biotech (NASDAQ:FBIO) Has Debt But No Earnings; Should You Worry?

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. Importantly, Fortress Biotech, Inc. (NASDAQ:FBIO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fortress Biotech

What Is Fortress Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fortress Biotech had US$75.1m of debt in June 2021, down from US$91.3m, one year before. However, its balance sheet shows it holds US$275.0m in cash, so it actually has US$199.9m net cash.

How Strong Is Fortress Biotech's Balance Sheet?

The latest balance sheet data shows that Fortress Biotech had liabilities of US$70.6m due within a year, and liabilities of US$99.3m falling due after that. On the other hand, it had cash of US$275.0m and US$27.0m worth of receivables due within a year. So it actually has US$132.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Fortress Biotech's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Fortress Biotech 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 ultimately the future profitability of the business will decide if Fortress Biotech 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.

Over 12 months, Fortress Biotech reported revenue of US$53m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Fortress Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Fortress Biotech 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$110m and booked a US$33m accounting loss. However, it has net cash of US$199.9m, so it has a bit of time before it will need more capital. Fortress Biotech'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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Fortress Biotech that you should be aware of.

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.

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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