Is LogicBio Therapeutics (NASDAQ:LOGC) Using Debt Sensibly?

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. We note that LogicBio Therapeutics, Inc. (NASDAQ:LOGC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for LogicBio Therapeutics

What Is LogicBio Therapeutics's Net Debt?

As you can see below, LogicBio Therapeutics had US$10.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$70.1m in cash, leading to a US$60.1m net cash position.

A Look At LogicBio Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that LogicBio Therapeutics had liabilities of US$6.15m due within 12 months and liabilities of US$13.1m due beyond that. On the other hand, it had cash of US$70.1m and US$263.0k worth of receivables due within a year. So it can boast US$51.1m more liquid assets than total liabilities.

This excess liquidity suggests that LogicBio Therapeutics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that LogicBio 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 LogicBio 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.

In the last year LogicBio Therapeutics managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is LogicBio Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that LogicBio Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$29m of cash and made a loss of US$33m. However, it has net cash of US$60.1m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 4 warning signs we've spotted with LogicBio Therapeutics .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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