Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies FibroGen, Inc. (NASDAQ:FGEN) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is FibroGen's Net Debt?
As you can see below, at the end of December 2020, FibroGen had US$18.7m of debt, up from US$16.8m a year ago. Click the image for more detail. But on the other hand it also has US$686.5m in cash, leading to a US$667.8m net cash position.
A Look At FibroGen's Liabilities
According to the last reported balance sheet, FibroGen had liabilities of US$163.2m due within 12 months, and liabilities of US$222.2m due beyond 12 months. Offsetting this, it had US$686.5m in cash and US$41.9m in receivables that were due within 12 months. So it actually has US$343.0m more liquid assets than total liabilities.
This surplus suggests that FibroGen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FibroGen 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 it is future earnings, more than anything, that will determine FibroGen'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.
Over 12 months, FibroGen made a loss at the EBIT level, and saw its revenue drop to US$176m, which is a fall of 31%. That makes us nervous, to say the least.
So How Risky Is FibroGen?
Although FibroGen had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$78m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with FibroGen .
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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