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.’ 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. We note that Fluidigm Corporation (NASDAQ:FLDM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Fluidigm’s Debt?
The image below, which you can click on for greater detail, shows that Fluidigm had debt of US$49.8m at the end of June 2019, a reduction from US$166.8m over a year. But on the other hand it also has US$68.9m in cash, leading to a US$19.0m net cash position.
A Look At Fluidigm’s Liabilities
We can see from the most recent balance sheet that Fluidigm had liabilities of US$37.3m falling due within a year, and liabilities of US$73.8m due beyond that. On the other hand, it had cash of US$68.9m and US$19.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.0m.
Since publicly traded Fluidigm shares are worth a total of US$387.3m, it seems unlikely that this level of liabilities would be a major threat. 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, Fluidigm 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 Fluidigm 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 Fluidigm managed to grow its revenue by 15%, to US$120m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Fluidigm?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Fluidigm had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$31m and booked a US$69m accounting loss. However, it has net cash of US$19.0m, so it has a bit of time before it will need more capital. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. For riskier companies like Fluidigm I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.