Health Check: How Prudently Does Pacific Biosciences of California (NASDAQ:PACB) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Pacific Biosciences of California, Inc. (NASDAQ:PACB) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Pacific Biosciences of California

How Much Debt Does Pacific Biosciences of California Carry?

As you can see below, Pacific Biosciences of California had US$892.8m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$509.8m in cash leading to net debt of about US$383.0m.

How Strong Is Pacific Biosciences of California's Balance Sheet?

The latest balance sheet data shows that Pacific Biosciences of California had liabilities of US$78.4m due within a year, and liabilities of US$938.4m falling due after that. Offsetting these obligations, it had cash of US$509.8m as well as receivables valued at US$32.4m due within 12 months. So it has liabilities totalling US$474.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$572.3m, so it does suggest shareholders should keep an eye on Pacific Biosciences of California's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pacific Biosciences of California's ability to maintain a healthy balance sheet going forward. 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 Pacific Biosciences of California wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$189m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Pacific Biosciences of California's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$302m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$261m of cash over the last year. So in short it's a really risky stock. 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 4 warning signs for Pacific Biosciences of California (1 makes us a bit uncomfortable) 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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