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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Orchard Therapeutics plc (NASDAQ:ORTX) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Orchard Therapeutics’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Orchard Therapeutics had US$24.5m of debt, an increase on none, over one year. But on the other hand it also has US$419.5m in cash, leading to a US$395.0m net cash position.
A Look At Orchard Therapeutics’s Liabilities
The latest balance sheet data shows that Orchard Therapeutics had liabilities of US$55.4m due within a year, and liabilities of US$31.5m falling due after that. On the other hand, it had cash of US$419.5m and US$12.6m worth of receivables due within a year. So it actually has US$345.1m more liquid assets than total liabilities.
It’s good to see that Orchard Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Orchard Therapeutics boasts net cash, so it’s fair to say it does not have a heavy debt load! 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’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Orchard 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 Orchard Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Orchard Therapeutics had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$131m and booked a US$140m accounting loss. But the saving grace is the US$420m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Orchard Therapeutics’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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