Is FibroGen (NASDAQ:FGEN) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, FibroGen, Inc. (NASDAQ:FGEN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for FibroGen

What Is FibroGen's Debt?

The image below, which you can click on for greater detail, shows that FibroGen had debt of US$17.6m at the end of December 2021, a reduction from US$18.7m over a year. But it also has US$405.2m in cash to offset that, meaning it has US$387.6m net cash.

How Strong Is FibroGen's Balance Sheet?

According to the last reported balance sheet, FibroGen had liabilities of US$225.5m due within 12 months, and liabilities of US$319.2m due beyond 12 months. Offsetting this, it had US$405.2m in cash and US$25.4m in receivables that were due within 12 months. So its liabilities total US$114.1m more than the combination of its cash and short-term receivables.

Since publicly traded FibroGen shares are worth a total of US$1.13b, 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. Despite its noteworthy liabilities, FibroGen 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 FibroGen can strengthen its balance sheet over time. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$235m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. Indeed, in that time it burnt through US$112m of cash and made a loss of US$290m. But the saving grace is the US$387.6m on the balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for FibroGen you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.