Frequency Therapeutics (NASDAQ:FREQ) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Frequency Therapeutics, Inc. (NASDAQ:FREQ) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 Frequency Therapeutics

What Is Frequency Therapeutics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Frequency Therapeutics had US$15.0m of debt, an increase on none, over one year. However, it does have US$148.1m in cash offsetting this, leading to net cash of US$133.1m.

A Look At Frequency Therapeutics' Liabilities

The latest balance sheet data shows that Frequency Therapeutics had liabilities of US$10.5m due within a year, and liabilities of US$44.6m falling due after that. Offsetting these obligations, it had cash of US$148.1m as well as receivables valued at US$2.89m due within 12 months. So it actually has US$95.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Frequency Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Frequency Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Frequency Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Frequency Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$24m, which is a fall of 24%. That makes us nervous, to say the least.

So How Risky Is Frequency Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Frequency Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$80m of cash and made a loss of US$73m. With only US$133.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 - Frequency Therapeutics has 3 warning signs we think you should be aware of.

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.