Is Orchard Therapeutics (NASDAQ:ORTX) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Orchard Therapeutics plc (NASDAQ:ORTX) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 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, 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.

See our latest analysis for Orchard Therapeutics

What Is Orchard Therapeutics's Debt?

The chart below, which you can click on for greater detail, shows that Orchard Therapeutics had US$33.1m in debt in September 2022; about the same as the year before. But on the other hand it also has US$146.6m in cash, leading to a US$113.4m net cash position.

How Strong Is Orchard Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Orchard Therapeutics had liabilities of US$50.3m falling due within a year, and liabilities of US$60.1m due beyond that. Offsetting these obligations, it had cash of US$146.6m as well as receivables valued at US$19.1m due within 12 months. So it can boast US$55.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Orchard Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Orchard 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 ultimately the future profitability of the business will decide if Orchard 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.

In the last year Orchard Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 1,255%, to US$16m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Orchard Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Orchard 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$104m and booked a US$179m accounting loss. However, it has net cash of US$113.4m, so it has a bit of time before it will need more capital. The good news for shareholders is that Orchard Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Orchard Therapeutics that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.