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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for FibroGen

How Much Debt Does FibroGen Carry?

As you can see below, FibroGen had US$15.4m of debt at September 2022, down from US$17.9m a year prior. But it also has US$408.5m in cash to offset that, meaning it has US$393.1m net cash.

How Healthy Is FibroGen's Balance Sheet?

We can see from the most recent balance sheet that FibroGen had liabilities of US$252.0m falling due within a year, and liabilities of US$310.6m due beyond that. Offsetting this, it had US$408.5m in cash and US$15.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$138.7m.

Since publicly traded FibroGen shares are worth a total of US$2.28b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, FibroGen also has more cash than debt, so we're pretty confident 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.

In the last year FibroGen had a loss before interest and tax, and actually shrunk its revenue by 57%, to US$123m. That makes us nervous, to say the least.

So How Risky Is FibroGen?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year FibroGen 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$188m and booked a US$362m accounting loss. But the saving grace is the US$393.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 2 warning signs 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.