Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Global Blood Therapeutics, Inc. (NASDAQ:GBT) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Global Blood Therapeutics Carry?
The image below, which you can click on for greater detail, shows that at September 2021 Global Blood Therapeutics had debt of US$149.5m, up from US$73.9m in one year. But it also has US$386.1m in cash to offset that, meaning it has US$236.6m net cash.
How Strong Is Global Blood Therapeutics' Balance Sheet?
According to the last reported balance sheet, Global Blood Therapeutics had liabilities of US$74.1m due within 12 months, and liabilities of US$225.3m due beyond 12 months. Offsetting this, it had US$386.1m in cash and US$23.9m in receivables that were due within 12 months. So it actually has US$110.6m more liquid assets than total liabilities.
This surplus suggests that Global Blood Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Global Blood Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Global Blood Therapeutics reported revenue of US$180m, which is a gain of 113%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
So How Risky Is Global Blood Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Global Blood Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$241m and booked a US$277m accounting loss. However, it has net cash of US$236.6m, so it has a bit of time before it will need more capital. The good news for shareholders is that Global Blood Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should be aware of the 1 warning sign we've spotted with Global Blood Therapeutics .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.