Health Check: How Prudently Does FibroGen (NASDAQ:FGEN) Use Debt?

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 can see that FibroGen, Inc. (NASDAQ:FGEN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for FibroGen

What Is FibroGen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FibroGen had US$16.4m of debt in June 2022, down from US$18.3m, one year before. But on the other hand it also has US$438.1m in cash, leading to a US$421.7m net cash position.

How Healthy Is FibroGen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FibroGen had liabilities of US$240.3m due within 12 months and liabilities of US$322.7m due beyond that. Offsetting this, it had US$438.1m in cash and US$33.6m in receivables that were due within 12 months. So its liabilities total US$91.3m more than the combination of its cash and short-term receivables.

Of course, FibroGen has a market capitalization of US$1.38b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, FibroGen boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if FibroGen 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 FibroGen wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to US$263m. With any luck the company will be able to grow its way to profitability.

So How Risky Is FibroGen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that FibroGen had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$118m and booked a US$220m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$421.7m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, FibroGen may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for FibroGen 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.