The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, LogicBio Therapeutics, Inc. (NASDAQ:LOGC) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does LogicBio Therapeutics Carry?
The image below, which you can click on for greater detail, shows that LogicBio Therapeutics had debt of US$9.08m at the end of September 2021, a reduction from US$9.97m over a year. However, its balance sheet shows it holds US$59.6m in cash, so it actually has US$50.5m net cash.
How Healthy Is LogicBio Therapeutics' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that LogicBio Therapeutics had liabilities of US$13.7m due within 12 months and liabilities of US$15.7m due beyond that. Offsetting this, it had US$59.6m in cash and US$119.0k in receivables that were due within 12 months. So it actually has US$30.3m more liquid assets than total liabilities.
This surplus liquidity suggests that LogicBio Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that LogicBio Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if LogicBio Therapeutics 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.
Over 12 months, LogicBio Therapeutics reported revenue of US$3.9m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is LogicBio Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months LogicBio Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$22m of cash and made a loss of US$38m. But at least it has US$50.5m on the balance sheet to spend on growth, near-term. LogicBio Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 5 warning signs for LogicBio Therapeutics that 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.