Global Blood Therapeutics (NASDAQ:GBT) Is Making Moderate Use Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Global Blood Therapeutics, Inc. (NASDAQ:GBT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for Global Blood Therapeutics

What Is Global Blood Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Global Blood Therapeutics had US$581.2m of debt, an increase on US$149.1m, over one year. However, it does have US$553.4m in cash offsetting this, leading to net debt of about US$27.8m.

A Look At Global Blood Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Global Blood Therapeutics had liabilities of US$79.3m due within 12 months and liabilities of US$656.2m due beyond that. Offsetting this, it had US$553.4m in cash and US$27.7m in receivables that were due within 12 months. So its liabilities total US$154.4m more than the combination of its cash and short-term receivables.

Given Global Blood Therapeutics has a market capitalization of US$1.58b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Global Blood Therapeutics'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 Global Blood Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to US$211m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Global Blood Therapeutics managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$290m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$252m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Global Blood Therapeutics is showing 3 warning signs in our investment analysis , 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.

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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.