Is FibroGen (NASDAQ:FGEN) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, 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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

As you can see below, FibroGen had US$17.4m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$428.1m in cash to offset that, meaning it has US$410.7m net cash.

How Healthy Is FibroGen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FibroGen had liabilities of US$255.4m due within 12 months and liabilities of US$312.5m due beyond that. Offsetting these obligations, it had cash of US$428.1m as well as receivables valued at US$43.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$96.0m.

Of course, FibroGen has a market capitalization of US$1.15b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 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 35%, to US$258m. With any luck the company will be able to grow its way to profitability.

So How Risky Is FibroGen?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that FibroGen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$112m of cash and made a loss of US$281m. While this does make the company a bit risky, it's important to remember it has net cash of US$410.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. FibroGen'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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - FibroGen has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.